##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  |  | For the fiscal year ended December 31, 2005                                                 
|  |  | OR                                                                                          
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  |  | For the transition period
    from          to                                              

Commission file number No. 0-23930





TARGETED GENETICS CORPORATION


(Exact name of Registrant as specified in its charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Washington               |  | 91-1549568                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

1100 Olive Way, Suite 100


Seattle, WA 98101


(Address of principal executive offices, including, zip
code)


(206) 623-7612


(Registrants telephone number, including area code)





Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, $0.01 Par Value





o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ






|                              |  |                 
|----------------------------- |  | ----------------
|Title of Class                |  | Number of Shares
|                              |  |                 
|Common Stock, $0.01 par value |  | 98,498,855      

DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










TARGETED GENETICS CORPORATION


ANNUAL REPORT ON
FORM 10-K


TABLE OF CONTENTS


|              |  |                                                                                                                          |  |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|              |  |                                                                                                                          |  | Page |   
|              |  |                                                                                                                          |  |      |   
|PART I       
|Item 1.       |  | Business                                                                                                                 |  |      | 2  | 
|Item 2.       |  | Properties                                                                                                               |  |      | 26 | 
|Item 3.       |  | Legal Proceedings                                                                                                        |  |      | 27 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                                  |  |      | 27 | 
|             
|PART II      
|Item 5.       |  | Market for the Registrants Common
    Equity, Related Shareholder Matters and Issuer Purchases of
    Equity Securities |  |      | 27 | 
|Item 6.       |  | Selected Financial Data                                                                                                  |  |      | 28 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |  |      | 28 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |  |      | 38 | 
|Item 8.       |  | Financial Statements and Supplementary
    Data                                                                          |  |      | 40 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |  |      | 62 | 
|Item 9A.      |  | Controls and Procedures                                                                                                  |  |      | 62 | 
|             
|PART III     
|Item 10.      |  | Directors and Executive Officers of
    Registrant                                                                       |  |      | 64 | 
|Item 11.      |  | Executive Compensation                                                                                                   |  |      | 64 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |  |      | 64 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                       |  |      | 65 | 
|Item 14.      |  | Principal Accounting Fees and Services                                                                                   |  |      | 65 | 
|             
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                      |  |      | 65 | 
|EXHIBIT 10.36
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



1



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PART I







|        |         
|------- | --------
|Item 1. | Business

This annual report on
Form 10-K contains
forward-looking statements that involve risks and uncertainties.
Forward-looking statements include statements about our product
development and commercialization goals and expectations,
potential market opportunities, our plans for and anticipated
results of our clinical development activities and the potential
advantage of our product candidates, our cash resources and
future financial condition, our ability to obtain additional
funding or enter into strategic collaborations and other
statements that are not historical facts. Words such as
may, can be, may depend,
will, believes, estimates,
expects, anticipates, plans,
projects, intends, or statements
concerning potential or opportunity and
other words of similar meaning or the negative thereof may
identify forward-looking statements, but the absence of these
words does not mean that the statement is not forward-looking.
In making these statements, we rely on a number of assumptions
and make predictions about the future. Our actual results could
differ materially from those stated in or implied by
forward-looking statements for a number of reasons, including
the risks described in the section entitled Factors
Affecting Our Operating Results, Our Business and Our Stock
Price in Part I, Item 1A of this annual
report.


You should not unduly rely on these forward-looking
statements, which speak only as of the date of this annual
report. We undertake no obligation to publicly revise any
forward-looking statement after the date of this annual report
to reflect circumstances or events occurring after the date of
this annual report or to conform the statement to actual results
or changes in our expectations. You should, however, review the
factors, risks and other information we provide in the reports
we file from time to time with the Securities and Exchange
Commission, or SEC.


BUSINESS OVERVIEW










| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Diverse product development pipeline. Each of our
    clinical and preclinical product candidates addresses a
    different market: in each case where we believe there is
    significant medical need for new or improved therapies.

2



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|                                                        |  |            |                          |                    |             |  |          |         |  |  |          |  |  |           |          |  |  |  |  | 
|------------------------------------------------------- |  | ---------- | ------------------------ | ------------------ | ----------- |  | -------- | ------- |  |  | -------- |  |  | --------- | -------- |  |  |  |  | 
|                                                        |  |            |                          | Development Status |            
|                                                        |  |            |                          |                    |            
|                                                        |  |            |                          | Research &         |             |  |         
|Description                                             |  | Indication |                          |                    | Preclinical |  |          | Phase I |  |  | Phase II |  |  | Phase III |         
|                                                        |  |            |                          |                    |             |  |          |         |  |  |          |  |  |           |         
|AAV delivery of TNF-alpha antagonist (tgAAC94)          |  |            | Inflammatory Arthritis   |                    |             |  | xxxxxxxx |         |  |  | xxxxxxxx |  |  |           |          |  |  |  |  | 
|AAV delivery of HIV antigen (tgAAC09)                   |  |            | HIV/AIDS                 |                    |             |  | xxxxxxxx |         |  |  | xxxxxxxx |  |  |           | xxxxxxxx |  |  |  |  | 
|AAV delivery of SERCA2a and phospholamban gene variants |  |            | Congestive Heart Failure |                    |             |  | xxxxxxxx |         |  |  |          |  |  |           |          |  |  |  |  | 
|AAV expression of htt siRNA                             |  |            | Huntingtons disease     |                    |             |  | xxxxxxxx |         |  |  |          |  |  |           |          |  |  |  |  | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Significant development and manufacturing expertise. We
    believe we are leaders in the development and application of
    processes to manufacture our potential products at a scale
    amenable to late-stage clinical development and expandable to
    large-scale commercial production. We have established broad
    capabilities in applying our AAV-based gene delivery
    technologies to several indications, and we have developed an
    infrastructure that allows us to expand these capabilities into
    multiple product opportunities. We have built development and
    regulatory expertise specific to gene therapy products. We
    believe that our collective product development expertise,
    including our experience with research and development,
    manufacturing, quality, and clinical and regulatory matters will
    serve as a critical asset in attracting product collaboration
    partners and provides a necessary foundation to move gene
    therapy from product discovery to commercialization.
|
| | Intellectual property assets. We have developed
    proprietary intellectual property, including methods of
    transferring genetic material into cells, processes to
    manufacture and purify gene delivery product candidates and
    other proprietary technologies and processes. Because patent and
    license rights are important assets of our business, our
    strategy is to file or license patent applications to protect
    technology, inventions and improvements to inventions that we
    consider important to developing our business. We have filed or
    licensed numerous patents or patent applications with the United
    States Patent and Trademark Office, or USPTO, and foreign
    jurisdictions. We also rely on unpatented proprietary technology
    such as trade secrets, know-how and continuing technological
    innovations.                                                                                                                                                                         



| |                  
| | -----------------
| | Business Strategy





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuing aggressive development of our pipeline. We
    plan to continue evaluating options in our clinical development
    efforts that will accelerate development and lead to nearer term
    clinical trial results and, ultimately commercialization. Our
    current priorities are the advancement of tgAAC94 as a therapy
    to treat inflammatory arthritis and the advancement of our
    partnered programs, including the development of an HIV/ AIDS
    vaccine, and product candidates for the treatment of congestive
    heart failure and Huntingtons disease.                                                                                                                                                           
|
| |  | Maximizing the value of our manufacturing and development
    expertise. It is our strategy to utilize our product
    development, regulatory and manufacturing capabilities in new
    product collaboration opportunities, similar to the
    collaborations we have entered into with Celladon Corporation,
    or Celladon, and Sirna Therapeutics, Inc., or Sirna. In
    addition, we may evaluate opportunities to maximize the value we
    have built in manufacturing viral vectors, including AAV
    vectors. Our manufacturing expertise may be applied to the
    production of other biologics, and we may pursue contract
    manufacturing relationships during periods of excess capacity in
    our manufacturing facility.
|
| |  | Pursuing additional product opportunities. Although we
    have made substantial progress toward the commercialization of
    AAV gene therapy product candidates, gene therapy as a field has
    not yet reached commercialization in the U.S., Europe, or Japan.
    We are committed to gene therapy but realize it may be prudent
    to pursue product development opportunities within the broad
    classes of                                                                                                                                                                                                                                                                                                                         

3



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diseases on which we currently focus. We are evaluating a range
    of opportunities that include mergers and acquisitions and
    product diversification with a particular focus on therapeutic
    indications of inflammation and infectious disease. We believe
    that a combination of novel candidates developed from our
    expertise in gene delivery along with complementary candidates
    may provide a beneficial balance of value and risk
    diversification for our shareholders. If we identify an
    appropriate opportunity to add additional value to our current
    business we intend to pursue the opportunity.







| |                  
| | -----------------
| | 2005 Achievements





| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We commenced work under our December 2004 collaboration
    agreement with Celladon to develop AAV-based therapies for
    congestive heart failure.                                                                                                                                                           
|
| |  | We expanded our AAV-based gene delivery platform into the area
    of RNA interference through our collaboration with Sirna
    Therapeutics to develop a treatment for Huntingtons
    disease.                                                                                                              
|
| |  | In February 2005, we and the International Aids Vaccine
    Initiative, or IAVI, reported preliminary results of a
    Phase I HIV/ AIDS vaccine clinical trial that met safety
    standards and indicated and that the vaccine was well tolerated.                                                           
|
| |  | In July 2005, we reported results of an initial Phase I
    clinical trial of our inflammatory arthritis candidate,
    demonstrating safety of an intra-articular injection of tgAAC94
    into inflamed joints and suggestive of improvements in arthritic
    signs and symptoms.                           
|
| |  | In October 2005, we initiated an extended Phase I clinical
    trial to evaluate tgAAC94 at higher dose levels in patients with
    inflammatory arthritis and who may be receiving concurrent
    treatments of anti-TNF-alpha therapy, but who continue to
    experience inflammation in one or more joints.
|
| |  | In November 2005, we initiated a Phase II HIV/ AIDS vaccine
    clinical trial in South Africa.                                                                                                                                                                                                                
|
| |  | We were named as a subcontractor to receive up to
    $18 million of a five year, $22 million NIAID contract
    with Columbus Childrens Research Institute and The
    Childrens Hospital of Philadelphia to develop AAV-based
    HIV/ AIDS vaccine for use in the developed world.                        
|
| |  | We were issued five additional patents from the USPTO covering
    our AAV vector patent portfolio.                                                                                                                                                                                                            
|
| |  | We strengthened our financial position through our agreement
    with Biogen Idec, or Biogen, to restructure the repayment of
    approximately $10.7 million of debt.                                                                                                                                         
|
| |  | In January 2006, we restructured operations to reduce expenses
    and concentrate resources on key product development programs
    and business development activities.                                                                                                                                      

4



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PROGRAMS IN CLINICAL TRIALS




| |                       
| | ----------------------
| | Inflammatory Arthritis



TNF-alpha






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intra-articular injections of tgAAC94 were safe and
    well-tolerated in subjects who were also taking conventional
    disease-modifying anti-rheumatic drugs.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | No tgAAC94 related serious adverse events were reported in the
    eleven tgAAC94 treated subjects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In those treated with a single dose of tgAAC94, continued
    measurable improvements in swelling and tenderness were
    observed. Six of the eleven tgAAC94 treated subjects received a
    higher dose and the reduction in mean tenderness and swelling
    scores appears to be greater than in the five of the eleven
    tgAAC94 treated subjects who received a lower dose. This
    suggests there may be a dose response effect. There was some
    improvement in mean tenderness and swelling scores in subjects
    receiving placebo, but these subjects were included primarily
    for safety analysis.
|
| |  | In the non-injected joints of the tgAAC94 treated subjects,
    there also appears to be a trend in the decrease in mean
    tenderness and swelling scores over time. This trend was not
    observed in the subjects receiving placebo.                                                                                                                                                                                                                                                                                                                                                                              





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| |                  
| | -----------------
| | HIV/ AIDS Vaccine

Sub-Saharan








6



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PRECLINICAL PROGRAMS




| |                         
| | ------------------------
| | Congestive Heart Failure



7



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| |                     
| | --------------------
| | Huntingtons Disease





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| |               
| | --------------
| | Hyperlipidemia



FORMER COLLABORATIONS




| |                           
| | --------------------------
| | Cystic Fibrosis Foundation



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| |            
| | -----------
| | Biogen Idec











| |      
| | -----
| | Wyeth





| |                           
| | --------------------------
| | Emerald Gene Systems, Ltd.



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LICENSING ARRANGEMENTS




| |               
| | --------------
| | Alkermes, Inc.





| |            
| | -----------
| | Amgen, Inc.





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PATENTS AND PROPRIETARY RIGHTS














12



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COMPETITION












GOVERNMENTAL REGULATION




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| |   |                                                         
| | - | --------------------------------------------------------
| |  | modify the scope of our desired product claims;         
|
| |  | add warnings or other safety-related information; and/or
|
| |  | perform additional testing.                             







EMPLOYEES




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AVAILABLE INFORMATION


10-K, 10-Q, 8-K http://www.sec.gov




|         |             
|-------- | ------------
|Item 1A. | Risk Factors



Risks Related to Our Business




| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to raise additional capital when needed,
    we will be unable to conduct our operations and develop our
    potential products.





| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate and extent of scientific progress in our research and
    development programs;                                                                                                         
|
| |  | the timing, costs and scope of, and our success in, conducting
    clinical trials, obtaining regulatory approvals and pursuing
    patent prosecutions;                                         
|
| |  | competing technological and market developments;                                                                                                                                                 
|
| |  | the ability to re-negotiate any lease obligations;                                                                                                                                               
|
| |  | the timing and costs of, and our success in any product
    commercialization activities and facility expansions, if and as
    required; and                                                    
|
| |  | the expense and outcome of any litigation or administrative
    proceedings involving our intellectual property, or access to
    third party intellectual property through licensing agreements.





| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | entering into additional product development and funding
    collaborations or other strategic transactions, or extending or
    expanding our current collaborations;
|
| |  | issuing equity in the public or private markets; or                                                                                                                   
|
| |  | issuing debt.                                                                                                                                                         

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S-3










| |                                                                                
| | -------------------------------------------------------------------------------
| | We expect to continue to operate at a loss and may never
    become profitable.





| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our product candidates are in early-stage clinical
    trials or preclinical development, and if we are unable to
    successfully develop and commercialize our product candidates we
    will be unable to generate sufficient capital to maintain our
    business.





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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to recruit subjects could delay or prevent
    clinical trials of our potential products, which could delay or
    prevent the development of potential products.





| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The regulatory approval process for our product candidates
    is costly, time-consuming and subject to unpredictable changes
    and delays, and our product candidates may never receive
    regulatory approval.







| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain or maintain licenses for
    necessary third-party technology on acceptable terms or to
    develop alternative technology, we may be unable to develop and
    commercialize our product candidates.



18



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| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the scope of rights granted under the license agreement and
    other interpretation-related issues;                                                            
|
| |  | the extent to which our technology and processes infringe on
    intellectual property of the licensor that is not subject to the
    licensing agreement;      
|
| |  | the sublicensing of patent and other rights under our
    collaborative development relationships;                                                              
|
| |  | the ownership of inventions and know-how resulting from the
    joint creation or use of intellectual property by our licensors
    and us and our partners; and
|
| |  | the priority of invention of patented technology.                                                                                                               





| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Litigation involving intellectual property, product
    liability or other claims and product recalls could strain our
    resources, subject us to significant liability, damage our
    reputation or result in the invalidation of our proprietary
    rights.



19



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| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | If we lose our collaborative partners, we may be unable to
    develop our potential products.





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not attract and retain qualified personnel, we
    may be unable to develop and commercialize some of our potential
    products.





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The reduction in workforce associated with our recent
    restructuring of operations may impair our ability to develop
    our product candidates and harm our operations.



20



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| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our partners or scientific consultants terminate,
    reduce or delay our relationships with them, we may be unable to
    develop our potential products.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The success of our clinical trials and preclinical studies
    may not be indicative of results in a large number of subjects
    of either safety or efficacy.





| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to adequately protect our proprietary
    rights domestically or overseas, which may limit our ability to
    successfully market any product candidates.



21



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| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not develop adequate development, manufacturing,
    sales, marketing and distribution capabilities, either alone or
    with our business partners, we will be unable to generate
    sufficient product revenue to maintain our business.







| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Post-approval manufacturing or product problems or failure
    to satisfy applicable regulatory requirements could prevent or
    limit our ability to market our products.



22



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Risks Related to Our Industry




| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse events in the field of gene therapy could damage
    public perception of our potential products and negatively
    affect governmental approval and regulation.







| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our use of hazardous materials exposes us to liability
    risks and regulatory limitations on their use, either of which
    could reduce our ability to generate product revenue.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The intense competition and rapid technological change in
    our market may result in failure of our potential products to
    achieve market acceptance.



23



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| |   |                                              
| | - | ---------------------------------------------
| |  | research and development;                    
|
| |  | clinical trials;                             
|
| |  | obtaining FDA and other regulatory approvals;
|
| |  | manufacturing; and                           
|
| |  | marketing and distribution.                  







| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Healthcare reform measures and the unwillingness of
    third-party payors to provide adequate reimbursement for the
    cost of our products could impair our ability to successfully
    commercialize our potential products and become
    profitable.





Risks Related to Our Common Stock




| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to comply with the minimum requirements
    for quotation on the NASDAQ Capital Market and we may be
    delisted from the NASDAQ Capital Market, the liquidity and
    market price of our common stock would decline.



24



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over-the 15g-9




| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | If we sell additional shares, our stock price may decline
    as a result of the dilution which will occur to existing
    stockholders.









| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Concentration of ownership of our common stock may give
    certain shareholders significant influence over our
    business.



25



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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | election of directors;                                                                               
|
| |  | amendment of our charter documents; or                                                               
|
| |  | approval of significant corporate transactions, such as a change
    of control of Targeted Genetics.







| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Market fluctuations or volatility could cause the market
    price of our common stock to decline and limit our ability to
    raise capital.








|        |            
|------- | -----------
|Item 2. | Properties.





26



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|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.






PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity
    Securities.

Market Information.


mark-up


|      |             |      |   |      |     |  |   |      | 
|----- | ----------- | ---- | - | ---- | --- |  | - | ---- | 
|      |             | High |   |      | Low | 
|      |             |      |   |      |     | 
|2005: |             |      |   |      |     |  |   |     
|      | 4th Quarter |      | $ | 0.72 |     |  | $ | 0.48 | 
|      | 3rd Quarter |      |   | 0.92 |     |  |   | 0.60 | 
|      | 2nd Quarter |      |   | 1.25 |     |  |   | 0.50 | 
|      | 1st Quarter |      |   | 1.90 |     |  |   | 0.40 | 
|2004: |             |      |   |      |     |  |   |     
|      | 4th Quarter |      | $ | 1.98 |     |  | $ | 1.13 | 
|      | 3rd Quarter |      |   | 1.62 |     |  |   | 0.94 | 
|      | 2nd Quarter |      |   | 2.22 |     |  |   | 1.24 | 
|      | 1st Quarter |      |   | 3.29 |     |  |   | 1.80 | 



Holders.


Dividends.


27



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |   |             |       |   |   |             |       |  
|---------------------------- | ------------------------------------------------------------------------ | ------------------------------------------- | - | ----------- | ---------- | - | - | ----------- | ----- | - | ---------- | ----------- | ----- | ---- | - | ----------- | ----- | - | - | ----------- | ----- | -
|                             |                                                                          | Year Ended December 31,                     |  
|                             |                                                                          |                                             |  
|                             |                                                                          | 2005(2)                                     |   |             | 2004(2)(3) |   |   | 2003(2)     |       |   | 2002(1)(2) |             |       | 2001 |  
|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |  
|Statement of Operations Data |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |   |             |       |   |   |            
|                             | Revenue                                                                  |                                             | $ | 6,874,000   |            |   | $ | 9,652,000   |       |   | $          | 14,073,000  |       |      | $ | 19,333,000  |       |   | $ | 18,880,000  |      
|                             | Operating expenses                                                       |                                             |   | 26,221,000  |            |   |   | 24,822,000  |       |   |            | 27,877,000  |       |      |   | 42,074,000  |       |   |   | 47,484,000  |      
|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |  
|                             | Loss from operations                                                     |                                             |   | (19,347,000 | )          |   |   | (15,170,000 | )     |   |            | (13,804,000 | )     |      |   | (22,741,000 | )     |   |   | (28,604,000 | )    
|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |  
|                             | Net loss applicable to common stock                                      |                                             | $ | (19,198,000 | )          |   | $ | (14,257,000 | )     |   | $          | (14,833,000 | )     |      | $ | (23,767,000 | )     |   | $ | (27,170,000 | )    
|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |  
|                             |                                                                          | Net loss per basic and diluted common share |   | $           | (0.22      | ) |   | $           | (0.18 | ) |            | $           | (0.26 | )    |   | $           | (0.52 | ) |   | $           | (0.62 | )
|                             | Shares used in computing basic and diluted net loss per common
    share |                                             |   | 85,635,000  |            |   |   | 79,451,000  |       |   |            | 57,486,000  |       |      |   | 45,767,000  |       |   |   | 43,928,000  |      
|                             |                                                                          |                                             |   |             |            |   |   |             |       |   |            |             |       |      |  

|                   |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |   |            |  |  |   |            | 
|------------------ | -------------------------- | ------------ | - | ---------- | ---- |  | - | ---------- |  |  | ---- | ---------- |  | ---- | - | ---------- |  |  | - | ---------- | 
|                   |                            | December 31, |  
|                   |                            |              |  
|                   |                            | 2005         |   |            | 2004 |  |   | 2003       |  |  | 2002 |            |  | 2001 |  
|                   |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |  
|Balance Sheet Data |                            |              |   |            |      |  |   |            |  |  |      |            |  |      |   |            |  |  |   |           
|                   | Cash and cash equivalents  |              | $ | 14,122,000 |      |  | $ | 34,096,000 |  |  | $    | 21,057,000 |  |      | $ | 12,606,000 |  |  | $ | 25,186,000 | 
|                   | Total assets               |              |   | 48,798,000 |      |  |   | 69,965,000 |  |  |      | 57,672,000 |  |      |   | 52,713,000 |  |  |   | 71,038,000 | 
|                   | Long-term obligations      |              |   | 8,177,000  |      |  |   | 10,182,000 |  |  |      | 11,227,000 |  |      |   | 20,494,000 |  |  |   | 16,403,000 | 
|                   | Preferred stock(4)         |              |   |           |      |  |   |           |  |  |      | 12,015,000 |  |      |   | 12,015,000 |  |  |   | 12,015,000 | 
|                   | Total shareholders equity |              | $ | 30,571,000 |      |  | $ | 49,762,000 |  |  | $    | 33,479,000 |  |      | $ | 5,896,000  |  |  | $ | 25,386,000 | 






|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2002, we changed our method of
    accounting for goodwill and other intangible assets. See
    Note 1 of the notes to our consolidated financial
    statements.                                                                                               
|   
|(2) | Operating expenses include restructure charges of
    $2.3 million in 2002, $5.2 million in 2003, $884,000
    in 2004 and $1.7 million in 2005. See Note 4 of the
    notes to our consolidated financial statements.                                                               
|   
|(3) | Reflects a $1.0 million gain on the sale of a
    majority-owned subsidiary in July 2004. See Note 7 of the
    notes to our consolidated financial statements.                                                                                                                      
|   
|(4) | As a result of the expiration of an exchange right of the holder
    in April 2003, we reclassified the Series B preferred stock
    from mezzanine equity to shareholders equity. The
    Series B preferred stock was converted by the holder into
    common stock in March 2004.






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.

OVERVIEW






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CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS


Description of Business and Summary of Significant
Accounting Policies,


29



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| |                           
| | --------------------------
| | Revenue Recognition Policy





| |                                                                         
| | ------------------------------------------------------------------------
| | Estimated Restructuring Charges Associated with the
    Bothell Facility

Accounting for Costs Associated with Exit or Disposal
Activities,








| |                                                
| | -----------------------------------------------
| | Valuation of Our Goodwill and Intangible Assets



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| |                                        
| | ---------------------------------------
| | Application of New Accounting Standards

Share-Based Payment. Accounting for Stock
Issued to Employees,




RESULTS OF OPERATIONS




| |        
| | -------
| | Revenue

|                                       |                                          |                         |           |           |      |   |           |           |  |   |            |           | 
|-------------------------------------- | ---------------------------------------- | ----------------------- | --------- | --------- | ---- | - | --------- | --------- |  | - | ---------- | --------- | 
|                                       |                                          | Year Ended December 31, |          
|                                       |                                          |                         |          
|                                       |                                          | 2005                    |           |           | 2004 |   |           | 2003      | 
|                                       |                                          |                         |           |           |      |   |           |           | 
|Revenue from collaborative agreements: |                                          |                         |           |           |      |   |           |           |  |   |            |          
|                                       | HIV/ AIDS vaccine  IAVI                 |                         | $         | 5,588,000 |      |   | $         | 8,340,000 |  |   | $          | 4,409,000 | 
|                                       | Congestive heart failure  Celladon      |                         |           | 777,000   |      |   |           |          |  |   |            |          | 
|                                       | Huntingtons disease  Sirna             |                         |           | 315,000   |      |   |           |          |  |   |            |          | 
|                                       | Multiple products  Biogen               |                         |           |          |      |   |           |          |  |   |            | 5,112,000 | 
|                                       | Hemophilia  Wyeth                       |                         |           |          |      |   |           |          |  |   |            | 3,894,000 | 
|                                       | Contract manufacturing revenue and other |                         |           | 194,000   |      |   |           | 1,312,000 |  |   |            | 658,000   | 
|                                       |                                          |                         |           |           |      |   |           |           | 
|Total revenue                          |                                          | $                       | 6,874,000 |           |      | $ | 9,652,000 |           |  | $ | 14,073,000 |          
|                                       |                                          |                         |           |           |      |   |           |           | 





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| |                   
| | ------------------
| | Operating Expenses

Research and Development.






|                                                 |                                                                             |                         |            |           |      |   |            |           |  |   |            |         | 
|------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------- | ---------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | ------- | 
|                                                 |                                                                             | Year Ended December 31, |           
|                                                 |                                                                             |                         |           
|                                                 |                                                                             | 2005                    |            |           | 2004 |   |            | 2003      | 
|                                                 |                                                                             |                         |            |           |      |   |            |           | 
|Programs in clinical development:                |                                                                             |                         |            |           |      |   |            |           |  |   |            |        
|                                                 | Inflammatory arthritis (initiated Phase I clinical trial in
    March 2004) |                         | $          | 2,444,000 |      |   | $          | 1,771,000 |  |   | $          |        | 
|                                                 | HIV/ AIDS vaccine (initiated Phase I clinical trial in
    December 2003)   |                         |            | 2,836,000 |      |   |            | 3,704,000 |  |   |            | 19,000  | 
|                                                 | Cystic fibrosis                                                             |                         |            | 534,000   |      |   |            | 823,000   |  |   |            | 566,000 | 
|                                                 | Cancer products                                                             |                         |            |          |      |   |            |          |  |   |            | 14,000  | 
|                                                 | Indirect costs                                                              |                         |            | 4,246,000 |      |   |            | 5,660,000 |  |   |            | 888,000 | 
|                                                 |                                                                             |                         |            |           |      |   |            |           | 
|Total programs in clinical development           |                                                                             |                         | 10,060,000 |           |      |   | 11,958,000 |           |  |   | 1,487,000  |        
|Programs in research and preclinical development |                                                                             |                         | 8,139,000  |           |      |   | 5,330,000  |           |  |   | 15,710,000 |        
|                                                 |                                                                             |                         |            |           |      |   |            |           | 
|Total research and development expense           |                                                                             | $                       | 18,199,000 |           |      | $ | 17,288,000 |           |  | $ | 17,197,000 |        
|                                                 |                                                                             |                         |            |           |      |   |            |           | 



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General and Administrative.


Restructure Charges.




|                                          |  |                         |           |  |      |   |         |      |  |   |           | 
|----------------------------------------- |  | ----------------------- | --------- |  | ---- | - | ------- | ---- |  | - | --------- | 
|                                          |  | Year Ended December 31, |          
|                                          |  |                         |          
|                                          |  | 2005                    |           |  | 2004 |   |         | 2003 | 
|                                          |  |                         |           |  |      |   |         |      | 
|Charges related to changes in assumptions |  | $                       | 1,132,000 |  |      | $ | 371,000 |      |  | $ | 4,718,000 | 
|Accretion expense                         |  |                         | 577,000   |  |      |   | 513,000 |      |  |   | 435,000   | 
|Employee termination and other            |  |                         |          |  |      |   |        |      |  |   | 37,000    | 
|                                          |  |                         |           |  |      |   |         |      | 
|Total restructuring charges               |  | $                       | 1,709,000 |  |      | $ | 884,000 |      |  | $ | 5,190,000 | 
|                                          |  |                         |           |  |      |   |         |      | 



Evaluation of Goodwill and Other Intangible Assets. Goodwill and Other Intangible
Assets


Investment Income.


33



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Interest Expense.


Gain on sale of majority-owned subsidiary.


Liquidity and Capital Resources












34



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S-3








35



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|                                                    |       |                                              |           |           |      |   |           |           |  |   |           |           |  |      |           |           |            |   |           |           |  |   |           |           |  |   |            |            | 
|--------------------------------------------------- | ----- | -------------------------------------------- | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- |  | ---- | --------- | --------- | ---------- | - | --------- | --------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                                    |       | Payments Due Through Year Ended December 31: |          
|                                                    |       |                                              |          
|Contractual Obligations                             |       | 2006                                         |           |           | 2007 |   |           | 2008      |  |   | 2009      |           |  | 2010 |           |           | Thereafter |   |           | Total     | 
|                                                    |       |                                              |           |           |      |   |           |           |  |   |           |           |  |      |           |           |            |   |           |           | 
|Long-term debt
    obligations                      |       | $                                            |          |           |      | $ | 3,150,000 |           |  | $ | 2,500,000 |           |  | $    | 2,500,000 |           |            | $ |          |           |  | $ |          |           |  | $ | 8,150,000  |           
|Interest related to long-term debt obligations      |       |                                              | 388,000   |           |      |   | 334,000   |           |  |   | 205,000   |           |  |      | 75,000    |           |            |   |          |           |  |   |          |           |  |   | 1,002,000  |           
|Equipment financing obligations                     |       |                                              | 155,000   |           |      |   | 26,000    |           |  |   | 1,000     |           |  |      |          |           |            |   |          |           |  |   |          |           |  |   | 182,000    |           
|Interest related to equipment financing obligations |       |                                              | 8,000     |           |      |   | 1,000     |           |  |   |          |           |  |      |          |           |            |   |          |           |  |   |          |           |  |   | 9,000      |           
|Operating lease obligations:                        |       |                                              |           |           |      |   |           |           |  |   |           |           |  |      |           |           |            |   |           |           |  |   |           |           |  |   |            |           
|Seattle facilities  occupied                       |       |                                              | 974,000   |           |      |   | 1,002,000 |           |  |   | 1,030,000 |           |  |      | 259,000   |           |            |   |          |           |  |   |          |           |  |   | 3,265000   |           
|Bothell facility  not occupied                     |       |                                              | 1,362,000 |           |      |   | 1,362,000 |           |  |   | 1,362,000 |           |  |      | 1,362,000 |           |            |   | 1,431,000 |           |  |   | 7,770,000 |           |  |   | 14,649,000 |           
|Purchase obligations                                |       |                                              | 708,000   |           |      |   |          |           |  |   |          |           |  |      |          |           |            |   |          |           |  |   |          |           |  |   | 708,000    |           
|                                                    |       |                                              |           |           |      |   |           |           |  |   |           |           |  |      |           |           |            |   |           |           | 
|                                                    | Total |                                              | $         | 3,595,000 |      |   | $         | 5,875,000 |  |   | $         | 5,098,000 |  |      | $         | 4,196,000 |            |   | $         | 1,431,000 |  |   | $         | 7,770,000 |  |   | $          | 27,965,000 | 
|                                                    |       |                                              |           |           |      |   |           |           |  |   |           |           |  |      |           |           |            |   |           |           | 









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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | entering into additional product development and funding
    collaborations or other strategic transactions, or extending or
    expanding our current collaborations;
|
| |  | selling or licensing our technology or product candidates;                                                                                                            
|
| |  | issuing equity in the public or private markets; or                                                                                                                   
|
| |  | issuing debt.                                                                                                                                                         

S-3










| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate and extent of scientific progress in our research and
    development programs;                                                                                                         
|
| |  | the timing, costs and scope of, and our success in clinical
    trials, obtaining regulatory approvals and filing, prosecuting
    and enforcing patents;                                        
|
| |  | competing technological and market developments;                                                                                                                                                 
|
| |  | the timing and costs of, and our success in any product
    commercialization activities and facility expansions, if and as
    required; and                                                    
|
| |  | the expense and outcome of any litigation or administrative
    proceedings involving our intellectual property, or access to
    third party intellectual property through licensing agreements.



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OFF-BALANCE SHEET ARRANGEMENTS






IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS


Share Based Payment. Accounting for Stock Issued to Employees, Statement of Cash
Flows.









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



| |                               
| | ------------------------------
| | Items with interest rate risk:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Short term investments: Because of the short-term nature
    of our investments, we believe that our exposure to market rate
    fluctuations on our investments is minimal. Currently, we do not
    use any derivative or other financial instruments or derivative
    commodity instruments to hedge any market risks and do not plan
    to employ these instruments in the future. At December 31,
    2005, we held $14.1 million in cash and cash equivalents,
    which are primarily invested in money market funds and
    denominated in U.S. dollars. An analysis of the impact on
    these securities of a hypothetical 10% change in short-term
    interest rates from those in effect at December 31, 2005,
    indicates that such a change in interest rates would not have a
    significant impact on our financial position or on our expected
    results of operations in 2006.
|
| |  | Notes payable: Our results of operations are affected by
    changes in short-term interest rates as a result of a loan from
    Biogen which contains a variable interest rate. Interest
    payments on this loan are                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | established quarterly based upon the one-year London Interbank
    Offered Rate, or LIBOR, plus 1%. As of December 31, 2005,
    we were accruing interest on the note at a rate of 5.68%. The
    carrying amount of the note payable approximates fair value
    because the interest rate on this instrument changes with, or
    approximates, market rates. The following table provides
    information as of December 31, 2005, about our obligations
    that are sensitive to changes in interest rate fluctuations:

|                   |  |                        |   |      |  |            |  |            |  |            |  |       |   |  |  |           
|------------------ |  | ---------------------- | - | ---- |  | ---------- |  | ---------- |  | ---------- |  | ----- | - |  |  | ----------
|                   |  | Expected Maturity Date
|                   |  |                       
|                   |  | 2006                   |   | 2007 |  | 2008       |  | 2009       |  | 2010       |  | Total
|                   |  |                        |   |      |  |            |  |            |  |            |  |      
|Variable rate note |  | $                      |  |      |  | $2,500,000 |  | $2,500,000 |  | $2,500,000 |  | $     |  |  |  | $7,500,000



| |                                                          
| | ---------------------------------------------------------
| | Items with market and foreign currency exchange
    risk:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Investment in Chromos Molecular Systems, Inc.: At
    December 31, 2005, we held 2.7 million shares of
    Chromos Molecular Systems, Chromos, common shares with a market
    value of $0.16 per common share denominated in Canadian
    dollars. As of December 31, 2005 the Canadian to US
    exchange rate was US $0.8580 per CA $1.00. As of
    December 31, 2005, the investment is recorded at $376,000
    with a $21,000 unrealized loss and is classified within prepaid
    expenses and other. We hold these shares of common stock as
    available-for-sale securities as we periodically sell them on
    the Toronto Stock Exchange. As a result of selling
    370,000 shares of Chromos stock in 2005, we recorded
    $32,000 of net realized losses and received $57,000 in cash. The
    amount of potential realizable value in this investment will be
    determined by the market, the exchange rate between the Canadian
    and US dollar and our ability to sell the shares in the open
    market.

39



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|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.

|                                                                                                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                 |  | Page |   
|                                                                                                                                 |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                      |  |      | 41 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                                                 |  |      | 42 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2005, 2004 and 2003                                   |  |      | 43 | 
|Consolidated Statements of Preferred Stock
    and Shareholders Equity for the years ended
    December 31, 2005, 2004 and 2003 |  |      | 44 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004 and 2003                                   |  |      | 45 | 
|Notes to Consolidated Financial
    Statements                                                                                   |  |      | 46 | 

40



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





41



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TARGETED GENETICS CORPORATION





CONSOLIDATED BALANCE SHEETS


|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |   |            |              |            |   | 
|--------------------------------------------- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------ | ---------- | - | ---------- | ------------ | ---------- | - | 
|                                              |                                                | December 31,                                                                                                                                                                                                                                 |                                                                                     
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                     
|                                              |                                                | 2005                                                                                                                                                                                                                                         |                                                                                      |              | 2004       |  
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|ASSETS                                       
|Current assets:                               |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |   |            |             
|                                              | Cash and cash equivalents                      |                                                                                                                                                                                                                                              | $                                                                                    | 14,122,000   |            |   | $          | 34,096,000   |           
|                                              | Accounts receivable                            |                                                                                                                                                                                                                                              |                                                                                      | 380,000      |            |   |            | 404,000      |           
|                                              | Prepaid expenses and other                     |                                                                                                                                                                                                                                              |                                                                                      | 683,000      |            |   |            | 653,000      |           
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|                                              |                                                | Total current assets                                                                                                                                                                                                                         |                                                                                      |              | 15,185,000 |   |            |              | 35,153,000 |  
|Property and equipment, net                   |                                                |                                                                                                                                                                                                                                              | 1,747,000                                                                            |              |            |   | 2,495,000  |             
|Goodwill                                      |                                                |                                                                                                                                                                                                                                              | 31,649,000                                                                           |              |            |   | 31,649,000 |             
|Other assets                                  |                                                |                                                                                                                                                                                                                                              | 217,000                                                                              |              |            |   | 668,000    |             
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|Total assets                                  |                                                | $                                                                                                                                                                                                                                            | 48,798,000                                                                           |              |            | $ | 69,965,000 |             
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|                                             
|LIABILITIES AND SHAREHOLDERS EQUITY         
|Current liabilities:                          |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |   |            |             
|                                              | Accounts payable and accrued expenses          |                                                                                                                                                                                                                                              | $                                                                                    | 1,770,000    |            |   | $          | 1,436,000    |           
|                                              | Accrued employee expenses                      |                                                                                                                                                                                                                                              |                                                                                      | 587,000      |            |   |            | 1,030,000    |           
|                                              | Current portion of accrued restructure charges |                                                                                                                                                                                                                                              |                                                                                      | 1,838,000    |            |   |            | 407,000      |           
|                                              | Deferred revenue                               |                                                                                                                                                                                                                                              |                                                                                      | 278,000      |            |   |            |             |           
|                                              | Current portion of long-term obligations       |                                                                                                                                                                                                                                              |                                                                                      | 155,000      |            |   |            | 1,122,000    |           
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|                                              |                                                | Total current liabilities                                                                                                                                                                                                                    |                                                                                      |              | 4,628,000  |   |            |              | 3,995,000  |  
|Accrued restructure charges and deferred rent |                                                |                                                                                                                                                                                                                                              | 5,422,000                                                                            |              |            |   | 6,026,000  |             
|Long-term obligations                         |                                                |                                                                                                                                                                                                                                              | 8,177,000                                                                            |              |            |   | 10,182,000 |             
|Commitments and Contingencies (Notes 2 and 6) |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |   |            |             
|Shareholders equity:                         |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |   |            |             
|                                              |                                                | Preferred stock, $0.01 par value, 6,000,000 shares
    authorized:                                                                                                                                                                           |                                                                                      |              |            |   |            |              |            |  
|                                              |                                                |                                                                                                                                                                                                                                              | Series A preferred stock, 800,000 shares designated,
    none issued and outstanding |              |            |  |            |              |            |  | 
|                                              |                                                | Common stock, $0.01 par value, 180,000,000 shares
    authorized, 85,694,244 shares issued and outstanding at
    December 31, 2005 and 120,000,000 shares authorized,
    85,626,326 shares issued and outstanding at
    December 31, 2004 |                                                                                      |              | 857,000    |   |            |              | 856,000    |  
|                                              | Additional paid-in capital                     |                                                                                                                                                                                                                                              |                                                                                      | 279,772,000  |            |   |            | 279,745,000  |           
|                                              | Accumulated deficit                            |                                                                                                                                                                                                                                              |                                                                                      | (250,037,000 | )          |   |            | (230,839,000 | )         
|                                              | Accumulated other comprehensive loss           |                                                                                                                                                                                                                                              |                                                                                      | (21,000      | )          |   |            |             |           
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|                                              |                                                | Total shareholders equity                                                                                                                                                                                                                   |                                                                                      |              | 30,571,000 |   |            |              | 49,762,000 |  
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  
|Total liabilities and shareholders equity    |                                                | $                                                                                                                                                                                                                                            | 48,798,000                                                                           |              |            | $ | 69,965,000 |             
|                                              |                                                |                                                                                                                                                                                                                                              |                                                                                      |              |            |  



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                              |                            |                          |             |            |            |   |             |            |            |   |             |            |            | 
|----------------------------------------------------------------------------- | -------------------------- | ------------------------ | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                              |                            | Year Ended December 31,  |            
|                                                                              |                            |                          |            
|                                                                              |                            | 2005                     |             |            | 2004       |   |             | 2003       |           
|                                                                              |                            |                          |             |            |            |   |             |            |           
|Revenue:                                                                      |                            |                          |             |            |            |   |             |            |            |   |             |           
|                                                                              | Collaborative revenue      |                          | $           | 6,874,000  |            |   | $           | 9,652,000  |            |   | $           | 14,073,000 |           
|Operating expenses:                                                           |                            |                          |             |            |            |   |             |            |            |   |             |           
|                                                                              | Research and development   |                          |             | 18,199,000 |            |   |             | 17,288,000 |            |   |             | 17,197,000 |           
|                                                                              | General and administrative |                          |             | 6,313,000  |            |   |             | 6,650,000  |            |   |             | 5,490,000  |           
|                                                                              | Restructure charges        |                          |             | 1,709,000  |            |   |             | 884,000    |            |   |             | 5,190,000  |           
|                                                                              |                            |                          |             |            |            |   |             |            |           
|                                                                              |                            | Total operating expenses |             |            | 26,221,000 |   |             |            | 24,822,000 |   |             |            | 27,877,000 | 
|                                                                              |                            |                          |             |            |            |   |             |            |           
|Loss from operations                                                          |                            |                          | (19,347,000 | )          |            |   | (15,170,000 | )          |            |   | (13,804,000 | )         
|Investment income                                                             |                            |                          | 661,000     |            |            |   | 383,000     |            |            |   | 183,000     |           
|Interest expense                                                              |                            |                          | (512,000    | )          |            |   | (476,000    | )          |            |   | (1,212,000  | )         
|Gain on sale of majority-owned subsidiary                                     |                            |                          |            |            |            |   | 1,006,000   |            |            |   |            |           
|                                                                              |                            |                          |             |            |            |   |             |            |           
|Net loss                                                                      |                            | $                        | (19,198,000 | )          |            | $ | (14,257,000 | )          |            | $ | (14,833,000 | )         
|                                                                              |                            |                          |             |            |            |   |             |            |           
|Net loss per common share (basic and diluted)                                 |                            | $                        | (0.22       | )          |            | $ | (0.18       | )          |            | $ | (0.26       | )         
|                                                                              |                            |                          |             |            |            |   |             |            |           
|Shares used in computation of basic and diluted net loss per
    common share |                            |                          | 85,635,000  |            |            |   | 79,451,000  |            |            |   | 57,486,000  |           
|                                                                              |                            |                          |             |            |            |   |             |            |           



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF PREFERRED STOCK


AND SHAREHOLDERS EQUITY


|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |             |   |   |         |         |   |   |            |             |  
|---------------------------- | -------------------------------------------------------------------------------- | --------------- | ------ | ------- | ------------ | - | ---------- | ----------- | - |  | ----------- | ---------- |  | --------------- | ------- | ------- | ------------- | - | ----------- | ---------- | - | - | ------------ | ----------- | - | - | ------- | ------- | - | - | ---------- | ----------- | -
|                             |                                                                                  | Series B        |        |         |              |   |            |             |   |  | Accumulated |            |  |                
|                             |                                                                                  | Preferred Stock |        |         | Common Stock |   |            |             |   |  |             | Other      |  |                 | Total   |        
|                             |                                                                                  |                 |        |         |              |   |            | Additional  |   |  | Accumulated |            |  | Comprehensive   |         |         | Shareholders |  
|                             |                                                                                  | Shares          |        |         | Amount       |   |            | Shares      |   |  | Amount      |            |  | Paid-In-Capital |         |         | Deficit       |   |             | Loss       |   |   | Equity       |            
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            
|Balance at December 31, 2002 |                                                                                  |                 | 12,015 |         |              | $ | 12,015,000 |             |   |  | 50,566,348  |            |  | $               | 506,000 |         |               | $ | 207,139,000 |            |   | $ | (201,749,000 | )           |   | $ |        |         |   | $ | 5,896,000  |            
|                             | Net loss and comprehensive loss  2003                                           |                 |        |        |              |   |            |            |   |  |             |           |  |                 |         |        |               |   |             |           |   |   |              | (14,833,000 | ) |   |         |        |   |   |            | (14,833,000 | )
|                             | Reclassification of Series B convertible preferred stock                         |                 |        |        |              |   |            | (12,015,000 | ) |  |             |           |  |                 |         |        |               |   |             | 12,015,000 |   |   |              |            |   |   |         |        |   |   |            | 12,015,000  |  
|                             | Issuance of shares for cash, net of issue costs of $1,387,000                    |                 |        |        |              |   |            |            |   |  |             | 7,777,778  |  |                 |         | 78,000  |               |   |             | 16,037,000 |   |   |              |            |   |   |         |        |   |   |            | 16,115,000  |  
|                             | Issuance of shares to Biogen for cash, net of issue costs of
    $2,000          |                 |        |        |              |   |            |            |   |  |             | 2,515,843  |  |                 |         | 25,000  |               |   |             | 4,768,000  |   |   |              |            |   |   |         |        |   |   |            | 4,793,000   |  
|                             | Issuance of shares to Elan for debt conversion                                   |                 |        |        |              |   |            |            |   |  |             | 5,203,244  |  |                 |         | 52,000  |               |   |             | 9,315,000  |   |   |              |            |   |   |         |        |   |   |            | 9,367,000   |  
|                             | Exercise of stock options                                                        |                 |        |        |              |   |            |            |   |  |             | 143,017    |  |                 |         | 1,000   |               |   |             | 125,000    |   |   |              |            |   |   |         |        |   |   |            | 126,000     |  
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            
|Balance at December 31, 2003 |                                                                                  |                 | 12,015 |         |              |   |           |             |   |  | 66,206,230  |            |  |                 | 662,000 |         |               |   | 249,399,000 |            |   |   | (216,582,000 | )           |   |   |        |         |   |   | 33,479,000 |            
|                             | Net loss and comprehensive loss  2004                                           |                 |        |        |              |   |            |            |   |  |             |           |  |                 |         |        |               |   |             |           |   |   |              | (14,257,000 | ) |   |         |        |   |   |            | (14,257,000 | )
|                             | Conversion of Series B convertible preferred stock                               |                 |        | (12,015 | )            |   |            |            |   |  |             | 4,330,000  |  |                 |         | 43,000  |               |   |             | (43,000    | ) |   |              |            |   |   |         |        |   |   |            |            |  
|                             | Issuance of shares for cash, net of issue costs of $1,742,000                    |                 |        |        |              |   |            |            |   |  |             | 10,854,257 |  |                 |         | 109,000 |               |   |             | 23,657,000 |   |   |              |            |   |   |         |        |   |   |            | 23,766,000  |  
|                             | Issuance of shares for cash, net of issue costs of $28,000                       |                 |        |        |              |   |            |            |   |  |             | 3,954,132  |  |                 |         | 39,000  |               |   |             | 5,933,000  |   |   |              |            |   |   |         |        |   |   |            | 5,972,000   |  
|                             | Issuance of shares to acquire minority interest in
    majority-owned subsidiary |                 |        |        |              |   |            |            |   |  |             | 158,764    |  |                 |         | 2,000   |               |   |             | 748,000    |   |   |              |            |   |   |         |        |   |   |            | 750,000     |  
|                             | Exercise of stock options                                                        |                 |        |        |              |   |            |            |   |  |             | 122,943    |  |                 |         | 1,000   |               |   |             | 51,000     |   |   |              |            |   |   |         |        |   |   |            | 52,000      |  
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            
|Balance at December 31, 2004 |                                                                                  |                 |       |         |              |   |           |             |   |  | 85,626,326  |            |  |                 | 856,000 |         |               |   | 279,745,000 |            |   |   | (230,839,000 | )           |   |   |        |         |   |   | 49,762,000 |            
|                             | Net loss  2005                                                                  |                 |        |        |              |   |            |            |   |  |             |           |  |                 |         |        |               |   |             |           |   |   |              | (19,198,000 | ) |   |         |        |   |   |            | (19,198,000 | )
|                             | Unrealized loss on available-for-sale securities                                 |                 |        |        |              |   |            |            |   |  |             |           |  |                 |         |        |               |   |             |           |   |   |              |            |   |   |         | (21,000 | ) |   |            | (21,000     | )
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            
|                             | Comprehensive net loss  2005                                                    |                 |        |        |              |   |            |            |   |  |             |           |  |                 |         |        |               |   |             |           |   |   |              |            |   |   |         | (21,000 | ) |   |            | (19,219,000 | )
|                             | Exercise of stock options                                                        |                 |        |        |              |   |            |            |   |  |             | 67,918     |  |                 |         | 1,000   |               |   |             | 27,000     |   |   |              |            |   |   |         |        |   |   |            | 28,000      |  
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            
|Balance at December 31, 2005 |                                                                                  |                 |       |         |              | $ |           |             |   |  | 85,694,244  |            |  | $               | 857,000 |         |               | $ | 279,772,000 |            |   | $ | (250,037,000 | )           |   | $ | (21,000 | )       |   | $ | 30,571,000 |            
|                             |                                                                                  |                 |        |         |              |   |            |             |   |  |             |            |  |                 |         |         |               |   |             |            |   |   |              |            



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TARGETED GENETICS CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |            |            |             |             |           |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------------ | ----------- | --------- | -------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | --------- | ---------- | -
|                                                     |                                                                                 | Year Ended December 31,                      |                                                                         
|                                                     |                                                                                 |                                              |                                                                         
|                                                     |                                                                                 | 2005                                         |                                                                          |             | 2004      |          |             | 2003        |           
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Operating activities:                                |                                                                                 |                                              |                                                                          |             |           |          |             |             |            |            |             |            
|                                                     | Net loss                                                                        |                                              | $                                                                        | (19,198,000 | )         |          | $           | (14,257,000 | )          |            | $           | (14,833,000 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                              |                                                                          |             |           |          |             |             |            |            |             |             |          
|                                                     |                                                                                 | Gain on sale of majority-owned subsidiary    |                                                                          |             |          |          |             |             | (1,006,000 | )          |             |             |          |           
|                                                     |                                                                                 | Depreciation and amortization                |                                                                          |             | 1,319,000 |          |             |             | 1,289,000  |            |             |             | 2,420,000 |           
|                                                     |                                                                                 | Non cash interest expense                    |                                                                          |             | 27,000    |          |             |             | 63,000     |            |             |             | 822,000   |           
|                                                     |                                                                                 | Gain on investments                          |                                                                          |             | (1,000    | )        |             |             |           |            |             |             |          |           
|                                                     |                                                                                 | Loss (gain) on sale/disposal of fixed assets |                                                                          |             | 98,000    |          |             |             | (51,000    | )          |             |             |          |           
|                                                     |                                                                                 | Changes in assets and liabilities:           |                                                                          |             |           |          |             |             |            |            |             |             |           |           
|                                                     |                                                                                 |                                              | Decrease (increase) in accounts receivable                               |             |           | 24,000   |             |             |            | (155,000   | )           |             |           | 1,004,000  |  
|                                                     |                                                                                 |                                              | Decrease (increase) in prepaid expenses and other                        |             |           | (107,000 | )           |             |            | 104,000    |             |             |           | 43,000     |  
|                                                     |                                                                                 |                                              | Decrease in other assets                                                 |             |           | 451,000  |             |             |            | 341,000    |             |             |           | 348,000    |  
|                                                     |                                                                                 |                                              | Increase (decrease) in current liabilities                               |             |           | (109,000 | )           |             |            | (193,000   | )           |             |           | 394,000    |  
|                                                     |                                                                                 |                                              | Increase (decrease) in deferred revenue                                  |             |           | 278,000  |             |             |            | (1,180,000 | )           |             |           | (4,861,000 | )
|                                                     |                                                                                 |                                              | Increase (decrease) in accrued restructure charges and deferred
    rent |             |           | 827,000  |             |             |            | (478,000   | )           |             |           | 3,433,000  |  
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Net cash used in operating activities                |                                                                                 |                                              | (16,391,000                                                              | )           |           |          | (15,523,000 | )           |            |            | (11,230,000 | )          
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Investing activities:                                |                                                                                 |                                              |                                                                          |             |           |          |             |             |            |            |             |            
|                                                     | Purchases of property and equipment                                             |                                              |                                                                          | (669,000    | )         |          |             | (408,000    | )          |            |             | (316,000    | )        
|                                                     | Proceeds from sales of investments                                              |                                              |                                                                          | 57,000      |           |          |             |            |            |            |             |            |          
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Net cash used in investing activities                |                                                                                 |                                              | (612,000                                                                 | )           |           |          | (408,000    | )           |            |            | (316,000    | )          
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Financing activities:                                |                                                                                 |                                              |                                                                          |             |           |          |             |             |            |            |             |            
|                                                     | Net proceeds from sales of capital stock                                        |                                              |                                                                          | 28,000      |           |          |             | 29,790,000  |            |            |             | 21,028,000  |          
|                                                     | Repayment of debt                                                               |                                              |                                                                          | (2,500,000  | )         |          |             |            |            |            |             |            |          
|                                                     | Proceeds from equipment financing arrangements                                  |                                              |                                                                          |            |           |          |             | 46,000      |            |            |             | 229,000     |          
|                                                     | Payments under equipment financing arrangements                                 |                                              |                                                                          | (499,000    | )         |          |             | (866,000    | )          |            |             | (1,260,000  | )        
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Net cash provided by (used in) financing activities  |                                                                                 |                                              | (2,971,000                                                               | )           |           |          | 28,970,000  |             |            |            | 19,997,000  |            
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Net increase (decrease) in cash and cash equivalents |                                                                                 |                                              | (19,974,000                                                              | )           |           |          | 13,039,000  |             |            |            | 8,451,000   |            
|Cash and cash equivalents, beginning of year         |                                                                                 |                                              | 34,096,000                                                               |             |           |          | 21,057,000  |             |            |            | 12,606,000  |            
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Cash and cash equivalents, end of year               |                                                                                 | $                                            | 14,122,000                                                               |             |           | $        | 34,096,000  |             |            | $          | 21,057,000  |            
|                                                     |                                                                                 |                                              |                                                                          |             |           |          |             |             |           
|Supplemental information:                            |                                                                                 |                                              |                                                                          |             |           |          |             |             |            |            |             |            
|                                                     | Cash paid for interest                                                          |                                              | $                                                                        | 441,000     |           |          | $           | 413,000     |            |            | $           | 459,000     |          



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TARGETED GENETICS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | Description of Business and Summary of Significant Accounting
    Policies



| |                        
| | -----------------------
| | Description of Business





| |                      
| | ---------------------
| | Basis of Presentation

(inactive) (inactive),




| |                 
| | ----------------
| | Cash Equivalents





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                       
| | ----------------------
| | Property and Equipment





| |                                   
| | ----------------------------------
| | Goodwill and Purchased Intangibles



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill
and Other Intangible Assets




| |                           
| | --------------------------
| | Prepaid Expenses and Other

Accounting for
Certain Investments in Debt and Equity Securities,




| |             
| | ------------
| | Other Assets

Accounting
for the Impairment or Disposal of Long-Lived Assets,




| |                            
| | ---------------------------
| | Accrued Restructure Charges

Accounting for Costs Associated with Exit or Disposal
Activities,




| |                                     
| | ------------------------------------
| | Series B Convertible Preferred Stock





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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                   
| | ------------------
| | Stock Compensation

Accounting for Stock-Based Compensation, Accounting for Stock Issued to
Employees, Share-Based
Payments




|                          |                                              |                         |   |             |      |  |   |             |   |  |   |             |  
|------------------------- | -------------------------------------------- | ----------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                          |                                              | Year Ended December 31, |  
|                          |                                              |                         |  
|                          |                                              | 2005                    |   |             | 2004 |  |   | 2003        |  
|                          |                                              |                         |   |             |      |  |   |             |  
|Net loss:                 |                                              |                         |   |             |      |  |   |             |   |  |   |            
|                          | As reported                                  |                         | $ | (19,198,000 | )    |  | $ | (14,257,000 | ) |  | $ | (14,833,000 | )
|                          | Add: Stock-based compensation under SFAS 123 |                         |   | (1,372,000  | )    |  |   | (1,564,000  | ) |  |   | (780,000    | )
|                          |                                              |                         |   |             |      |  |   |             |  
|                          | Pro forma                                    |                         | $ | (20,570,000 | )    |  | $ | (15,821,000 | ) |  | $ | (15,613,000 | )
|                          |                                              |                         |   |             |      |  |   |             |  
|Basic net loss per share: |                                              |                         |   |             |      |  |   |             |   |  |   |            
|                          | As reported                                  |                         | $ | (0.22       | )    |  | $ | (0.18       | ) |  | $ | (0.26       | )
|                          | Pro forma                                    |                         |   | (0.24       | )    |  |   | (0.20       | ) |  |   | (0.27       | )



| |                                                   
| | --------------------------------------------------
| | Revenue Recognition under Collaborative Agreements







| |                                                                
| | ---------------------------------------------------------------
| | Significant Revenue Relationships and Concentration of
    Risk



48



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                               
| | ------------------------------
| | Research and Development Costs





| |                 
| | ----------------
| | Operating Leases





| |                          
| | -------------------------
| | Net Loss per Common Share





| |                 
| | ----------------
| | Use of Estimates





| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

Share Based Payment. Accounting for Stock Issued to Employees, Statement of Cash
Flows.






| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123R for all share-based payments granted

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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123R that
    remain unvested on the effective date, or                                                                                                                                                                
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS No. 123
    for purposes of pro forma disclosures either (a) all prior
    periods presented or (b) prior interim periods of the year
    of adoption.





| |                  
| | -----------------
| | Reclassifications





|   |                                 
|-- | --------------------------------
|2. | Liquidity and Managements Plans







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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|3. | Property and Equipment



|                                               |  |              |             |   |      |   |             |  
|---------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                               |  | December 31, |            
|                                               |  |              |            
|                                               |  | 2005         |             |   | 2004 |  
|                                               |  |              |             |   |      |  
|Furniture and equipment                        |  | $            | 6,783,000   |   |      | $ | 6,410,000   |  
|Leasehold improvements                         |  |              | 9,756,000   |   |      |   | 9,739,000   |  
|                                               |  |              |             |   |      |  
|                                               |  |              | 16,539,000  |   |      |   | 16,149,000  |  
|Less accumulated depreciation and amortization |  |              | (14,792,000 | ) |      |   | (13,654,000 | )
|                                               |  |              |             |   |      |  
|                                               |  | $            | 1,747,000   |   |      | $ | 2,495,000   |  
|                                               |  |              |             |   |      |  





|   |                    
|-- | -------------------
|4. | Restructure Charges





|                         |                               |             |         |         |             |   |           |            |  |   |        |        |  |   |           |            | 
|------------------------ | ----------------------------- | ----------- | ------- | ------- | ----------- | - | --------- | ---------- |  | - | ------ | ------ |  | - | --------- | ---------- | 
|                         |                               | Employee    |         |         | Contract    |   |           | Other      |  |   |       
|                         |                               | Termination |         |         | Termination |   |           | Associated |  |   |       
|                         |                               | Benefits    |         |         | Costs       |   |           | Costs      |  |   | Total  |       
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|Incurred in 2002         |                               | $           | 725,000 |         |             | $ | 1,602,000 |            |  | $ |       |        |  | $ | 2,327,000 |           
|Incurred in 2003         |                               |             | 5,000   |         |             |   | 5,153,000 |            |  |   | 32,000 |        |  |   | 5,190,000 |           
|Incurred in 2004         |                               |             |        |         |             |   | 884,000   |            |  |   |       |        |  |   | 884,000   |           
|Incurred in 2005         |                               |             |        |         |             |   | 1,709,000 |            |  |   |       |        |  |   | 1,709,000 |           
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|                         | Cumulative incurred to date   |             |         | 730,000 |             |   |           | 9,348,000  |  |   |        | 32,000 |  |   |           | 10,110,000 | 
|Estimated future charges |                               |             |        |         |             |   | 7,329,000 |            |  |   |       |        |  |   | 7,329,000 |           
|                         |                               |             |         |         |             |   |           |            |  |   |        |       
|                         | Total expected to be incurred |             | $       | 730,000 |             |   | $         | 16,677,000 |  |   | $      | 32,000 |  |   | $         | 17,439,000 | 
|                         |                               |             |         |         |             |   |           |            |  |   |        |       

51



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                    |                                           |             |           |           |  
|----------------------------------- | ----------------------------------------- | ----------- | --------- | --------- | -
|                                    |                                           | Contract    |          
|                                    |                                           | Termination |          
|                                    |                                           | Costs       |          
|                                    |                                           |             |          
|December 31, 2004 accrued liability |                                           | $           | 6,348,000 |          
|                                    | Charges related to changes in assumptions |             |           | 1,132,000 |  
|                                    | Accretion expense                         |             |           | 577,000   |  
|                                    | Amount paid in 2005                       |             |           | (908,000  | )
|                                    |                                           |             |          
|December 31, 2005 accrued liability |                                           | $           | 7,149,000 |          
|                                    |                                           |             |          





| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | an increase in the square footage available for sublease and
    related increase in sublease income;
|
| |  | an increase in the amount of time necessary to find a sublease
    tenant;                           
|
| |  | an increase in broker commissions; and                                                               
|
| |  | a decrease in estimated costs of tenant improvements.                                                







|   |                      
|-- | ---------------------
|5. | Long-Term Obligations



|                                |  |              |           |   |      |   |            |  
|------------------------------- |  | ------------ | --------- | - | ---- | - | ---------- | -
|                                |  | December 31, |          
|                                |  |              |          
|                                |  | 2005         |           |   | 2004 |  
|                                |  |              |           |   |      |  
|Loans payable to Biogen Idec    |  | $            | 8,150,000 |   |      | $ | 10,624,000 |  
|Equipment financing obligations |  |              | 182,000   |   |      |   | 680,000    |  
|                                |  |              |           |   |      |  
|                                |  |              | 8,332,000 |   |      |   | 11,304,000 |  
|Less current portion            |  |              | (155,000  | ) |      |   | (1,122,000 | )
|                                |  |              |           |   |      |  
|                                |  | $            | 8,177,000 |   |      | $ | 10,182,000 |  
|                                |  |              |           |   |      |  

52



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|   |            
|-- | -----------
|6. | Commitments



|                         |                              |   |           |            | 
|------------------------ | ---------------------------- | - | --------- | ---------- | 
|Year Ending December 31, |                              |  
|                         |                              |  
|2006                     |                              | $ | 2,336,000 |           
|2007                     |                              |   | 2,364,000 |           
|2008                     |                              |   | 2,392,000 |           
|2009                     |                              |   | 1,622,000 |           
|2010                     |                              |   | 1,431,000 |           
|Thereafter               |                              |   | 7,770,000 |           
|                         |                              |   |          
|                         | Total minimum lease payments |   | $         | 17,915,000 | 
|                         |                              |   |          

53



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##### Table of Contents



TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




7.                Investment
in Chromos Molecular Systems, Inc.






|                                                                       |  |   |           | 
|---------------------------------------------------------------------- |  | - | --------- | 
|Deposits received from Chromos to fund pre-closing operating
    costs |  | $ | 502,000   | 
|Estimated fair value of consideration received                         |  |   | 453,000   | 
|Net liabilities assumed by Chromos                                     |  |   | 51,000    | 
|                                                                       |  |   |          
|                                                                       |  | $ | 1,006,000 | 
|                                                                       |  |   |          





|                                                                           |  |      |          |  
|-------------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                           |  | 2005 |         
|                                                                           |  |      |         
|Impact of Chromos securities activity on investment income                 |  |      |          |  
|Write down of debenture in the first quarter                               |  | $    | (63,000  | )
|Other-than-temporary loss on Chromos securities in the second
    quarter  |  |      | (181,000 | )
|Gain on receipt of debenture payments in the third and fourth
    quarters |  |      | 277,000  |  
|Realized losses on sales of Chromos securities, net                        |  |      | (32,000  | )
|                                                                           |  |      |         
|Increase in investment income attributable to Chromos activity             |  | $    | 1,000    |  
|                                                                           |  |      |         



54



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                         
|-- | ------------------------
|8. | Other Comprehensive Loss



|                                                 |  |              |             |   |      |   |             |  
|------------------------------------------------ |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                 |  | December 31, |            
|                                                 |  |              |            
|                                                 |  | 2005         |             |   | 2004 |  
|                                                 |  |              |             |   |      |  
|Net loss as reported                             |  | $            | (19,198,000 | ) |      | $ | (14,257,000 | )
|Other comprehensive loss:                        |  |              |             |   |      |   |             |  
|Unrealized loss on available-for-sale securities |  |              | (37,000     | ) |      |   |            |  
|Foreign currency translation adjustment          |  |              | 16,000      |   |      |   |            |  
|                                                 |  |              |             |   |      |  
|Other comprehensive loss                         |  | $            | (19,219,000 | ) |      | $ | (14,257,000 | )
|                                                 |  |              |             |   |      |  



|   |                     
|-- | --------------------
|9. | Shareholders Equity



| |                        
| | -----------------------
| | Stock Purchase Warrants





| |                        
| | -----------------------
| | Shareholder Rights Plan





55



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |              
| | -------------
| | Stock Options





|                           |           |        |           |            |       |   |         |             |  |  |           |  | 
|-------------------------- | --------- | ------ | --------- | ---------- | ----- | - | ------- | ----------- |  |  | --------- |  | 
|                           |           |        |           | Weighted   |       |   |        
|                           |           |        |           | Average    |       |   |        
|                           |           |        |           | Exercise   |       |   | Options |            
|                           |           | Shares |           |            | Price |   |         | Exercisable | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2002 |           |        | 4,439,407 |            |       | $ | 3.80    |             |  |  | 2,389,393 | 
|                           | Granted   |        |           | 1,060,250  |       |   |         | 0.54        |  |  |           |  | 
|                           | Exercised |        |           | (143,017   | )     |   |         | 0.88        |  |  |           |  | 
|                           | Expired   |        |           | (4,400     | )     |   |         | 0.55        |  |  |           |  | 
|                           | Forfeited |        |           | (1,254,553 | )     |   |         | 3.78        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2003 |           |        | 4,097,687 |            |       |   | 3.07    |             |  |  | 2,706,127 | 
|                           | Granted   |        |           | 2,517,950  |       |   |         | 1.35        |  |  |           |  | 
|                           | Exercised |        |           | (122,943   | )     |   |         | 0.43        |  |  |           |  | 
|                           | Expired   |        |           | (97,666    | )     |   |         | 4.81        |  |  |           |  | 
|                           | Forfeited |        |           | (301,970   | )     |   |         | 3.52        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2004 |           |        | 6,093,058 |            |       |   | 2.36    |             |  |  | 3,416,598 | 
|                           | Granted   |        |           | 1,528,200  |       |   |         | 0.88        |  |  |           |  | 
|                           | Exercised |        |           | (67,918    | )     |   |         | 0.41        |  |  |           |  | 
|                           | Expired   |        |           | (84,501    | )     |   |         | 3.91        |  |  |           |  | 
|                           | Forfeited |        |           | (427,969   | )     |   |         | 1.61        |  |  |           |  | 
|                           |           |        |           |            |       |   |         |             | 
|Balance, December 31, 2005 |           |        | 7,040,870 |            |       |   | 2.09    |             |  |  | 4,320,432 | 
|                           |           |        |           |            |       |   |         |             | 

56



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |               |               |           |           |             |   |                  |                  |  |  |               |          |  |          |           |           |  |   |      |      | 
|-------------------------- | ------------- | ------------- | --------- | --------- | ----------- | - | ---------------- | ---------------- |  |  | ------------- | -------- |  | -------- | --------- | --------- |  | - | ---- | ---- | 
|                           |               | Outstanding   |           |           | Exercisable |  
|                           |               |               |           |           |             |  
|                           |               |               |           | Weighted  |             |   | Weighted Average |                  |  |  |               | Weighted | 
|                           |               |               |           | Average   |             |   | Remaining        |                  |  |  |               | Average  | 
|                           |               | Number of     |           |           | Exercise    |   |                  | Contractual Life |  |  | Number of     |          |  | Exercise |          
|Range of Exercise Prices   |               | Option Shares |           |           | Price       |   |                  | (Years)          |  |  | Option Shares |          |  | Price    |          
|                           |               |               |           |           |             |   |                  |                  |  |  |               |          |  |          |          
|$0.29 - $ 0.49             |               |               | 572,117   |           |             | $ | 0.38             |                  |  |  | 7.23          |          |  |          | 532,429   |           |  | $ | 0.37 |     
|                           | 0.60 -   0.84 |               |           | 677,604   |             |   |                  | 0.75             |  |  |               | 8.01     |  |          |           | 311,534   |  |   |      | 0.78 | 
|                           | 0.91 -   1.28 |               |           | 1,300,418 |             |   |                  | 0.97             |  |  |               | 8.76     |  |          |           | 261,574   |  |   |      | 1.08 | 
|                           | 1.31 -   1.31 |               |           | 1,947,200 |             |   |                  | 1.31             |  |  |               | 8.38     |  |          |           | 837,071   |  |   |      | 1.31 | 
|                           | 1.32 -   2.53 |               |           | 1,076,454 |             |   |                  | 1.90             |  |  |               | 4.42     |  |          |           | 958,528   |  |   |      | 1.93 | 
|                           | 2.57 -  14.88 |               |           | 1,467,077 |             |   |                  | 5.53             |  |  |               | 4.78     |  |          |           | 1,419,296 |  |   |      | 5.63 | 
|Balance, December 31, 2005 |               |               | 7,040,870 |           |             |   | 2.09             |                  |  |  | 6.97          |          |  |          | 4,320,432 |           |  |   | 2.70 |     



|                                                           |  |      |            |  |      |  |            |      |  |  |            | 
|---------------------------------------------------------- |  | ---- | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                                           |  | 2005 |            |  | 2004 |  |            | 2003 | 
|                                                           |  |      |            |  |      |  |            |      | 
|Expected dividend rate                                     |  |      | Nil        |  |      |  | Nil        |      |  |  | Nil        | 
|Expected stock price volatility range                      |  |      | 1.09-1.12  |  |      |  | 1.12-1.47  |      |  |  | 1.47-1.51  | 
|Risk-free interest rate range                              |  |      | 3.63-4.36% |  |      |  | 2.71-4.47% |      |  |  | 1.62-4.19% | 
|Expected life of options range                             |  |      | 4-5 years  |  |      |  | 4 years    |      |  |  | 4 years    | 
|Weighted average fair value (per share) of options granted |  |      | $0.75      |  |      |  | $1.27      |      |  |  | $0.49      | 



| |                
| | ---------------
| | Reserved Shares



|                                                            |  |  |            | 
|----------------------------------------------------------- |  |  | ---------- | 
|Stock options granted                                       |  |  | 7,040,870  | 
|Available for future stock option grants under Option Plans |  |  | 2,993,541  | 
|Stock purchase warrants                                     |  |  | 2,000,000  | 
|                                                            |  |  |           
|Total shares reserved                                       |  |  | 12,034,411 | 
|                                                            |  |  |           

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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                   
|--- | ----------------------------------
|10. | Collaborative and Other Agreements



|                       |        |                         |           |   |      |   |           |      |  |   |            |           | 
|---------------------- | ------ | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | --------- | 
|                       |        | Year Ended December 31, |          
|                       |        |                         |          
|                       |        | 2005                    |           |   | 2004 |   |           | 2003 | 
|                       |        |                         |           |   |      |   |           |      | 
|IAVI                   |        | $                       | 5,588,000 |   |      | $ | 8,340,000 |      |  | $ | 4,409,000  |          
|Celladon               |        |                         | 777,000   |   |      |   |          |      |  |   |           |          
|Sirna                  |        |                         | 315,000   |   |      |   |          |      |  |   |           |          
|Former collaborations: |        |                         |           |   |      |   |           |      |  |   |            |          
|                       | Biogen |                         |           |  |      |   |           |     |  |   |            | 5,112,000 | 
|                       | Wyeth  |                         |           |  |      |   |           |     |  |   |            | 3,894,000 | 
|Other                  |        |                         | 194,000   |   |      |   | 1,312,000 |      |  |   | 658,000    |          
|                       |        |                         |           |   |      |   |           |      | 
|                       |        | $                       | 6,874,000 |   |      | $ | 9,652,000 |      |  | $ | 14,073,000 |          
|                       |        |                         |           |   |      |   |           |      | 



| |                                                
| | -----------------------------------------------
| | International AIDS Vaccine Initiative Agreement







| |                       
| | ----------------------
| | Celladon Collaboration



58



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                 
| | --------------------------------
| | Sirna Therapeutics Collaboration





| |                            
| | ---------------------------
| | Former Biogen Collaboration







| |                           
| | --------------------------
| | Former Wyeth Collaboration





|    |                         
|--- | ------------------------
|11. | Employee Retirement Plan





|    |             
|--- | ------------
|12. | Income Taxes



59



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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |                                                |              |             |            |      |   |             |            | 
|------------------------------------------- | ---------------------------------------------- | ------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | 
|                                            |                                                | December 31, |            
|                                            |                                                |              |            
|                                            |                                                | 2005         |             |            | 2004 |  
|                                            |                                                |              |             |            |      |  
|Deferred tax assets                         |                                                |              |             |            |      |   |             |           
|                                            | Net operating loss carry-forwards              |              | $           | 57,190,000 |      |   | $           | 51,230,000 | 
|                                            | Capital loss carry-forwards                    |              |             | 1,910,000  |      |   |             | 2,080,000  | 
|                                            | Research and orphan drug credit carry-forwards |              |             | 7,460,000  |      |   |             | 7,000,000  | 
|                                            | Depreciation and amortization                  |              |             | 3,340,000  |      |   |             | 3,270,000  | 
|                                            | Restructure and other                          |              |             | 2,810,000  |      |   |             | 2,430,000  | 
|                                            |                                                |              |             |            |      |  
|Gross deferred tax assets                   |                                                |              | 72,710,000  |            |      |   | 66,010,000  |           
|Valuation allowance for deferred tax assets |                                                |              | (72,710,000 | )          |      |   | (66,010,000 | )         
|                                            |                                                |              |             |            |      |  
|Net deferred tax asset                      |                                                | $            |            |            |      | $ |            |           
|                                            |                                                |              |             |            |      |  







|    |                  
|--- | -----------------
|13. | Subsequent Events





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TARGETED GENETICS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                      
|--- | -----------------------------------------------------
|14. | Condensed Quarterly Financial Information (unaudited)



|                                            |  |               |            |   |          |   |            |               |  |   |              |   |  |   |            |  
|------------------------------------------- |  | ------------- | ---------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | - | ---------- | -
|                                            |  | Quarter Ended |           
|                                            |  |               |           
|                                            |  | March 31,     |            |   | June 30, |   |            | September 30, |  |   | December 31, |  
|                                            |  | 2005          |            |   | 2005     |   |            | 2005          |  |   | 2005         |  
|                                            |  |               |            |   |          |   |            |               |  |   |              |  
|Revenue                                     |  | $             | 2,000,000  |   |          | $ | 1,462,000  |               |  | $ | 1,468,000    |   |  | $ | 1,944,000  |  
|Restructure charges                         |  |               | 219,000    |   |          |   | 119,000    |               |  |   | 1,188,000    |   |  |   | 183,000    |  
|Loss from operations                        |  |               | (4,643,000 | ) |          |   | (5,125,000 | )             |  |   | (5,863,000   | ) |  |   | (3,716,000 | )
|Net loss                                    |  |               | (4,672,000 | ) |          |   | (5,294,000 | )             |  |   | (5,683,000   | ) |  |   | (3,549,000 | )
|Basic and diluted net loss per common share |  |               | (0.05      | ) |          |   | (0.06      | )             |  |   | (0.07        | ) |  |   | (0.04      | )

|                                            |  |               |            |   |          |   |            |               |  |   |              |   |  |   |            |  
|------------------------------------------- |  | ------------- | ---------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | - | ---------- | -
|                                            |  | Quarter Ended |           
|                                            |  |               |           
|                                            |  | March 31,     |            |   | June 30, |   |            | September 30, |  |   | December 31, |  
|                                            |  | 2004          |            |   | 2004     |   |            | 2004          |  |   | 2004         |  
|                                            |  |               |            |   |          |   |            |               |  |   |              |  
|Revenue                                     |  | $             | 1,320,000  |   |          | $ | 2,761,000  |               |  | $ | 2,388,000    |   |  | $ | 3,183,000  |  
|Restructure charges                         |  |               | 195,000    |   |          |   | 221,000    |               |  |   | 381,000      |   |  |   | 87,000     |  
|Loss from operations                        |  |               | (4,862,000 | ) |          |   | (4,354,000 | )             |  |   | (3,737,000   | ) |  |   | (2,217,000 | )
|Net loss                                    |  |               | (4,858,000 | ) |          |   | 4,450,000  | )             |  |   | (2,724,000   | ) |  |   | (2,225,000 | )
|Basic and diluted net loss per common share |  |               | (0.07      | ) |          |   | (0.05      | )             |  |   | (0.03        | ) |  |   | (0.03      | )

61



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure.








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

Evaluation of disclosure controls and procedures. 10-K.


Managements annual report on internal control over
financial reporting.






| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) pertain to the maintenance of records that, in
    reasonable detail, accurately and fairly reflect our
    transactions and dispositions of the assets;                                                                                                                                                                                          
|
| | (2) provide reasonable assurance that transactions are
    recorded as necessary to permit preparation of financial
    statements in accordance with generally accepted accounting
    principles, and that our receipts and expenditures are being
    made only in accordance with authorizations of our management
    and Board of Directors; and
|
| | (3) provide reasonable assurance regarding prevention or
    timely detection of unauthorized acquisition, use, or
    disposition of our assets that could have a material effect on
    the financial statements.                                                                                                                                   





10-K


Changes in internal control over financial reporting. 10-K


62



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##### Table of Contents



Report of Independent Registered Public Accounting Firm


















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





63



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PART III







|         |                                               
|-------- | ----------------------------------------------
|Item 10. | Directors and Executive Officers of Registrant



Code of Ethics


S-K,







|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters.



Securities Authorized for Issuance under Equity Compensation
Plans.


|                                                                          |       |                         |           |           |                      |   |      |                           |  |  |           |           | 
|------------------------------------------------------------------------- | ----- | ----------------------- | --------- | --------- | -------------------- | - | ---- | ------------------------- |  |  | --------- | --------- | 
|                                                                          |       | Number of Securities    |           |           |                      |   |     
|                                                                          |       | to be Issued Upon       |           |           | Weighted-Average     |   |      | Number of Securities      | 
|                                                                          |       | Exercise of Outstanding |           |           | Exercise Price of    |   |      | Remaining Available for   | 
|                                                                          |       | Options, Warrants and   |           |           | Outstanding Options, |   |      | Future Issuance Under     | 
|                                                                          |       | Rights                  |           |           | Warrants and Rights  |   |      | Equity Compensation Plans | 
|                                                                          |       |                         |           |           |                      |   |      |                           | 
|Equity compensation plans approved by security holders                    |       |                         | 7,040,870 |           |                      | $ | 2.09 |                           |  |  | 2,993,541 |          
|Equity compensation plans not subject to approval by security
    holders |       |                         | 2,000,000 |           |                      |   | 3.33 |                           |  |  |          |          
|                                                                          |       |                         |           |           |                      |   |      |                           | 
|                                                                          | Total |                         |           | 9,040,870 |                      |   |      | 2.60                      |  |  |           | 2,993,541 | 
|                                                                          |       |                         |           |           |                      |   |      |                           | 



64



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##### Table of Contents








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K.



|   |                     
|-- | --------------------
|1. | Financial Statements



|                                                                                                                                 |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                 |  | Page |   
|                                                                                                                                 |  |      |   
|Report of Independent Registered Public Accounting Firm                                                                          |  |      | 39 | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                     |  |      | 40 | 
|Consolidated Statements of Operations for the years ended
    December 31, 2005, 2004 and 2003                                   |  |      | 41 | 
|Consolidated Statements of Preferred Stock and
    Shareholders Equity for the years ended December 31,
    2005, 2004 and 2003 |  |      | 42 | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003                                   |  |      | 43 | 
|Notes to Consolidated Financial Statements                                                                                       |  |      | 44 | 



|   |                              
|-- | -----------------------------
|2. | Financial Statement Schedules





|   |         
|-- | --------
|3. | Exhibits

65



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##### Table of Contents



INDEX TO EXHIBITS


|            |    |    |                     |                                                                                                                                                                                             |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | -- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |    |                     | Incorporated by Reference                                                                                                                                                                   |     
|            |    |    |                     |                                                                                                                                                                                             |     
|Exhibit No. |    |    | Exhibit Description |                                                                                                                                                                                             | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |    |                     |                                                                                                                                                                                             |      |  |      |      |  |            |  |  |                | 
|            | 3  | .1 |                     | Amended and Restated Articles of Incorporation                                                                                                                                              |      |  | 8-K  |      |  | 05/26/2005 |  |  | 3.1            |  |  |  |  | 
|            | 3  | .2 |                     | Amended and Restated Bylaws                                                                                                                                                                 |      |  | 10-K |      |  | 12/31/1996 |  |  | 3.2            |  |  |  |  | 
|            | 4  | .1 |                     | Rights Agreement, dated as of October 17, 1996, between
    Targeted Genetics and ChaseMellon Shareholder Services                                                                          |      |  | 8-A  |      |  | 10/22/1996 |  |  | 2.1            |  |  |  |  | 
|            | 4  | .2 |                     | First Amendment of Rights Agreement, dated July 21, 1999,
    between Targeted Genetics and ChaseMellon Shareholder Services                                                                |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.9            |  |  |  |  | 
|            | 4  | .3 |                     | Second Amendment to Rights Agreement, dated September 25,
    2002, between Targeted Genetics and Mellon Investor Services LLC
    (formerly known as ChaseMellon Investor Services L.L.C.) |      |  | 8-K  |      |  | 10/10/2002 |  |  | 10.1           |  |  |  |  | 
|            | 4  | .4 |                     | Third Amendment to Rights Agreement, dated January 23,
    2003, between Targeted Genetics and Mellon Investor Services LLC                                                                 |      |  | 10-K |      |  | 12/31/2002 |  |  | 4.4            |  |  |  |  | 
|            | 4  | .5 |                     | Fourth Amendment to Rights Agreement, dated as of
    September 2, 2003, between Targeted Genetics and Mellon
    Investor Services LLC                                                     |      |  | 8-K  |      |  | 10/1/2003  |  |  | 4.1            |  |  |  |  | 
|            | 10 | .1 |                     | Form of Indemnification Agreement between Targeted Genetics and
    its officers and directors                                                                                              |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.1           |  |  |  |  | 
|            | 10 | .2 |                     | Form of Senior Management Employment Agreement between the
    registrant and its executive officers                                                                                        |      |  | 10-K |      |  | 12/31/1996 |  |  | 10.2           |  |  |  |  | 
|            | 10 | .3 |                     | Gene Transfer Technology License Agreement, dated as of
    February 18, 1992, between Immunex Corporation and Targeted
    Genetics*                                                       |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.3           |  |  |  |  | 
|            | 10 | .4 |                     | PHS Patent License Agreement  Non-Exclusive, dated as
    of July 13, 1993, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*                   |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.4           |  |  |  |  | 
|            | 10 | .5 |                     | PHS Patent License Agreement  Exclusive, dated as of
    March 10, 1994, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*                      |      |  | 10-K |      |  | 12/31/1997 |  |  | 10.10          |  |  |  |  | 
|            | 10 | .6 |                     | Patent License Agreement, dated as of December 25, 1993,
    between The University of Florida Research Foundation, Inc. and
    Targeted Genetics*                                         |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.5           |  |  |  |  | 
|            | 10 | .7 |                     | First Amended and Restated License Agreement, effective as of
    October 12, 1995, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*              |      |  | S-1  |      |  | 4/16/1996  |  |  | 10.30          |  |  |  |  | 

66



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|            |    |     |                     |                                                                                                                                                                                                                      |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | --- | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                            |     
|            |    |     |                     |                                                                                                                                                                                                                      |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                                      | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                                      |      |  |      |      |  |            |  |  |                | 
|            | 10 | .8  |                     | Amendment to First Amended and Restated License Agreement, dated
    as of June 19, 1996, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*                                 |      |  | 10-Q |      |  | 6/30/1996  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .9  |                     | Second Amendment to First Amended and Restated License
    Agreement, dated as of April 17, 1998, between The
    University of Tennessee Research Corporation and RGene
    Therapeutics, Inc.*                     |      |  | 10-K |      |  | 12/31/1998 |  |  | 10.16          |  |  |  |  | 
|            | 10 | .10 |                     | Exclusive Sublicense Agreement, dated June 9, 1999, between
    Targeted Genetics and Alkermes, Inc.*                                                                                                                |      |  | 8-K  |      |  | 1/6/1999   |  |  | 10.36          |  |  |  |  | 
|            | 10 | .11 |                     | Amendment Agreement to Exclusive Sublicense Agreement, dated as
    of March 12, 2002, between Targeted Genetics and Alkermes,
    Inc.*                                                                             |      |  | 10-K |      |  | 12/31/2003 |  |  | 10.52          |  |  |  |  | 
|            | 10 | .12 |                     | Amendment No. 2 to Exclusive Sublicense Agreement, dated as
    of May 29, 2003, between Targeted Genetics and
    Alkermes, Inc.*                                                                                   |      |  | 8-K  |      |  | 10/1/2003  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .13 |                     | Common Stock and Warrants Issuance Agreement, dated June 9,
    1999, by and between Targeted Genetics and
    Alkermes, Inc.                                                                                        |      |  | 10-Q |      |  | 6/30/1999  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .14 |                     | Warrant Agreements, dated June 9, 1999, by and between
    Targeted Genetics and Alkermes, Inc.                                                                                                                      |      |  | 10-Q |      |  | 6/30/1999  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .15 |                     | Funding Agreement, dated as of July 21, 1999, among
    Targeted Genetics, Elan International Services, Ltd., and Elan
    Corporation, plc                                                                          |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.3            |  |  |  |  | 
|            | 10 | .16 |                     | Subscription, Joint Development and Operating Agreement, dated
    as of July 21, 1999, among Elan Corporation, plc, Elan
    International Services, Ltd., Targeted Genetics and Targeted
    Genetics Newco, Ltd.* |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.4            |  |  |  |  | 
|            | 10 | .17 |                     | Convertible Promissory Note, dated July 21, 1999, issued by
    Targeted Genetics to Elan International Services, Ltd.                                                                                               |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.5            |  |  |  |  | 
|            | 10 | .18 |                     | License Agreement dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Targeted Genetics*                                                                                                              |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.6            |  |  |  |  | 
|            | 10 | .19 |                     | License Agreement, dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a
    division of Elan Corporation, plc*                                                     |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.7            |  |  |  |  | 

67



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|            |    |     |                     |                                                                                                                                                                                                              |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | --- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                    |     
|            |    |     |                     |                                                                                                                                                                                                              |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                              | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                              |      |  |      |      |  |            |  |  |                | 
|            | 10 | .20 |                     | Termination Agreement, dated March 31, 2004, among Targeted
    Genetics, Elan Corporation PLC, Elan Pharma International
    Limited, Elan International Services, Ltd. and Emerald Gene
    Systems, Ltd.* |      |  | 8-K  |      |  | 4/06/2004  |  |  | 99.2           |  |  |  |  | 
|            | 10 | .21 |                     | Agreement and Plan of Merger dated as of August 8, 2000,
    among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition
    Corporation and Biogen, Inc.*                                                  |      |  | 8-K  |      |  | 8/23/2000  |  |  | 2.1            |  |  |  |  | 
|            | 10 | .22 |                     | Development and Marketing Agreement, dated as of August 8,
    2000, between Targeted Genetics, Genovo, Inc. and
    Biogen, Inc.                                                                            |      |  | 8-K  |      |  | 9/13/200   |  |  | 10.1           |  |  |  |  | 
|            | 10 | .23 |                     | Funding Agreement dated as of August 8, 2000, between
    Targeted Genetics and Biogen, Inc.                                                                                                                 |      |  | 8-K  |      |  | 9/13/2000  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .24 |                     | Amendment to Funding Agreement, dated as of July 14, 2003,
    between Targeted Genetics and Biogen, Inc.                                                                                                    |      |  | 8-K  |      |  | 7/22/2003  |  |  | 10.3           |  |  |  |  | 
|            | 10 | .25 |                     | Amendment No. 2 to Funding Agreement, dated
    September 1, 2005, between Targeted Genetics and Biogen Idec                                                                                                 |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.1           |  |  |  |  | 
|            | 10 | .26 |                     | Amended and Restated Promissory Note of Targeted Genetics dated
    September 1, 2005 (issued to Biogen Idec in principal
    amount of $10,000,000)                                                         |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.2           |  |  |  |  | 
|            | 10 | .27 |                     | Amended and Restated Promissory Note of Targeted Genetics dated
    September 1, 2005 (issued to Biogen Idec in principal
    amount of $650,000)                                                            |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.3           |  |  |  |  | 
|            | 10 | .28 |                     | Industrial Collaboration Agreement, dated as of February 1,
    2000, between the International Aids Vaccine Initiative, Inc.,
    Childrens Research Institute and Targeted Genetics*                      |      |  | 10-Q |      |  | 9/30/2002  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .29 |                     | Amendment No. 1 to Industrial Collaboration Agreement,
    dated as of March 14, 2003, among the International Aids
    Vaccine Initiative, Inc., Childrens Research Institute and
    Targeted Genetics*   |      |  | 10-K |      |  | 12/31/2002 |  |  | 10.42          |  |  |  |  | 
|            | 10 | .29 |                     | Amendment No. 2 to Industrial Collaboration Agreement,
    dated August 1, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute*             |      |  | 10-Q |      |  | 9/30/2003  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .30 |                     | Amendment No. 3 to Industrial Collaboration Agreement,
    dated December 2, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute*           |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.2           |  |  |  |  | 

68



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|            |    |     |                     |                                                                                                                                                                                                                       |      |  |      |      |  |            |  |  |                |  |  |  |   | 
|----------- | -- | --- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  | - | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                             |     
|            |    |     |                     |                                                                                                                                                                                                                       |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                                       | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                                       |      |  |      |      |  |            |  |  |                | 
|            | 10 | .31 |                     | Study Funding Agreement, dated as of April 23, 2003,
    between Targeted Genetics and Cystic Fibrosis Foundation
    Therapeutics, Inc.*                                                                             |      |  | 10-Q |      |  | 3/31/2003  |  |  | 10.2           |  |  |  |   | 
|            | 10 | .32 |                     | Collaboration Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                            |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.56          |  |  |  |   | 
|            | 10 | .34 |                     | Manufacturing Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                            |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.57          |  |  |  |   | 
|            | 10 | .35 |                     | Common Stock Purchase Agreement, dated December 31, 2004,
    by and among Targeted Genetics, Enterprise Partners and Venrock
    Partners                                                                            |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.58          |  |  |  |   | 
|            | 10 | .35 |                     | Biological Processing Services Agreement, dated as of
    March 28, 2003, between GenVec, Inc. and Targeted Genetics*                                                                                                 |      |  | 10-Q |      |  | 3/31/2003  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .36 |                     | Agreement Under an NIH Prime Award, dated February 8, 2006,
    between The Childrens Hospital of Philadelphia and
    Targeted Genetics*                                                                            |      |  | 10-K |      |  |            |  |  |                |  |  |  | X | 
|            | 10 | .37 |                     | Office Lease, dated as of October 7, 1996, between Benaroya
    Capital Company, LLC and Targeted Genetics                                                                                                            |      |  | 10-K |      |  | 12/31/1996 |  |  | 10.26          |  |  |  |   | 
|            | 10 | .39 |                     | Second Lease Amendment, dated February 25, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                      |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.2           |  |  |  |   | 
|            | 10 | .40 |                     | Third Lease Amendment, dated April 19, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                          |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.3           |  |  |  |   | 
|            | 10 | .41 |                     | Fourth Lease Amendment, dated March 28, 2001, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                         |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.4           |  |  |  |   | 
|            | 10 | .42 |                     | Fifth Lease Amendment, dated January 2, 2004, between
    Targeted Genetics and Benaroya Capital Company, LLC*                                                                                                        |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.3           |  |  |  |   | 
|            | 10 | .43 |                     | Canyon Park Building Lease, dated as of June 30, 2000,
    between Targeted Genetics and CarrAmerica Corporation                                                                                                      |      |  | 10-Q |      |  | 6/30/2000  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .44 |                     | Olive Way Building Lease, dated as of November 20, 1993, as
    amended, between Targeted Genetics and Ironwood Apartments, Inc.
    (successor in interest to Metropolitan Federal Savings and
    Loan Association) |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.29          |  |  |  |   | 
|            | 10 | .45 |                     | Fifth Amendment to Lease Agreement, dated as of June 20,
    2003, between Targeted Genetics and Ironwood Apartments,
    Inc.                                                                                        |      |  | 8-K  |      |  | 7/22/2003  |  |  | 10.2           |  |  |  |   | 

69



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|            |    |     |                     |                                                                                                                                                           |      |  |      |      |  |            |  |  |                |  |  |  |   | 
|----------- | -- | --- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  | - | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                 |     
|            |    |     |                     |                                                                                                                                                           |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                           | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                           |      |  |      |      |  |            |  |  |                | 
|            | 10 | .46 |                     | Sixth Amendment to Lease Agreement, dated as of November 1,
    2003, between Targeted Genetics and Ironwood
    Apartments, Inc.*                        |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .47 |                     | 1992 Restated Stock Option Plan                                                                                                                           |      |  | S-8  |      |  | 7/10/1998  |  |  | 99.1           |  |  |  |   | 
|            | 10 | .48 |                     | Stock Option Plan for Nonemployee Directors                                                                                                               |      |  | 10-Q |      |  | 3/31/2001  |  |  | 10.34          |  |  |  |   | 
|            | 10 | .49 |                     | 1999 Stock Option Plan, as amended and restated March 22,
    2004                                                                                        |      |  | S-8  |      |  | 6/17/2004  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .50 |                     | 2000 Genovo Inc. Roll-Over Stock Option Plan                                                                                                              |      |  | S-8  |      |  | 10/19/2000 |  |  | 99.1           |  |  |  |   | 
|            | 21 | .1  |                     | Subsidiaries of Targeted Genetics                                                                                                                         |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 23 | .1  |                     | Consent of Independent Registered Public Accounting Firm                                                                                                  |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 31 | .1  |                     | Certification of Chief Executive Officer pursuant to
    Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
    Act of 1934, as amended          |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 31 | .2  |                     | Certification of Chief Financial Officer pursuant to
    Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
    Act of 1934, as amended          |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 32 | .1  |                     | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 32 | .2  |                     | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |      |  |      |      |  |            |  |  |                |  |  |  | X | 






|  |                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Portions of these exhibits have been omitted based on a grant of
    or application for confidential treatment from the SEC. The
    omitted portions of these exhibits have been filed separately
    with the SEC.

70



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##### Table of Contents



SIGNATURES






| |                              
| | -----------------------------
| | TARGETED GENETICS CORPORATION



| |     |                      
| | --- | ---------------------
| | By: | /s/ H. Stewart Parker

| |                                      
| | -------------------------------------
| |                                      
| | H. Stewart Parker                    
| | President and Chief Executive Officer

POWER OF ATTORNEY


attorney-in attorneys-in attorneys-in




|                                                                     |  |                                                                                                                     |  |                |  | 
|-------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                            |  | Title                                                                                                               |  | Date          
|                                                                     |  |                                                                                                                     |  |               
|                                                                    
|/s/ H. Stewart ParkerH. Stewart Parker                               |  | President, Chief Executive Officer
    and Director
    (Principal Executive Officer)                               |  | March 14, 2006
|                                                                    
|/s/ David J. PostonDavid J. Poston                                   |  | Vice President, Finance, Chief Financial Officer and Treasurer
    (Principal Financial and
    Accounting Officer) |  | March 14, 2006
|                                                                    
|/s/ Jeremy L. Curnock
    CookJeremy L. Curnock Cook                 |  | Chairman of the Board                                                                                               |  | March 14, 2006
|                                                                    
|/s/ Jack L. BowmanJack L. Bowman                                     |  | Director                                                                                                            |  | March 14, 2006
|                                                                    
|/s/ Joseph M.
    Davie, Ph.D., M.D.Joseph M.
    Davie, Ph.D., M.D. |  | Director                                                                                                            |  | March 14, 2006
|                                                                    
|/s/ Roger L. HawleyRoger L. Hawley                                   |  | Director                                                                                                            |  | March 14, 2006
|                                                                    
|/s/ Louis P. LacasseLouis P. Lacasse                                 |  | Director                                                                                                            |  | March 14, 2006
|                                                                    
|Nelson L. Levy, Ph.D., M.D.                                          |  | Director                                                                                                            |  | March   , 2006
|                                                                    
|Michael S. Perry, D.V.M, Ph.D.                                       |  | Director                                                                                                            |  | March   , 2006

71



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EXHIBIT INDEX


|            |    |    |                     |                                                                                                                                                                                             |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | -- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |    |                     | Incorporated by Reference                                                                                                                                                                   |     
|            |    |    |                     |                                                                                                                                                                                             |     
|Exhibit No. |    |    | Exhibit Description |                                                                                                                                                                                             | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |    |                     |                                                                                                                                                                                             |      |  |      |      |  |            |  |  |                | 
|            | 3  | .1 |                     | Amended and Restated Articles of Incorporation                                                                                                                                              |      |  | 8-K  |      |  | 05/26/2005 |  |  | 3.1            |  |  |  |  | 
|            | 3  | .2 |                     | Amended and Restated Bylaws                                                                                                                                                                 |      |  | 10-K |      |  | 12/31/1996 |  |  | 3.2            |  |  |  |  | 
|            | 4  | .1 |                     | Rights Agreement, dated as of October 17, 1996, between
    Targeted Genetics and ChaseMellon Shareholder Services                                                                          |      |  | 8-A  |      |  | 10/22/1996 |  |  | 2.1            |  |  |  |  | 
|            | 4  | .2 |                     | First Amendment of Rights Agreement, dated July 21, 1999,
    between Targeted Genetics and ChaseMellon Shareholder Services                                                                |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.9            |  |  |  |  | 
|            | 4  | .3 |                     | Second Amendment to Rights Agreement, dated September 25,
    2002, between Targeted Genetics and Mellon Investor Services LLC
    (formerly known as ChaseMellon Investor Services L.L.C.) |      |  | 8-K  |      |  | 10/10/2002 |  |  | 10.1           |  |  |  |  | 
|            | 4  | .4 |                     | Third Amendment to Rights Agreement, dated January 23,
    2003, between Targeted Genetics and Mellon Investor Services LLC                                                                 |      |  | 10-K |      |  | 12/31/2002 |  |  | 4.4            |  |  |  |  | 
|            | 4  | .5 |                     | Fourth Amendment to Rights Agreement, dated as of
    September 2, 2003, between Targeted Genetics and Mellon
    Investor Services LLC                                                     |      |  | 8-K  |      |  | 10/1/2003  |  |  | 4.1            |  |  |  |  | 
|            | 10 | .1 |                     | Form of Indemnification Agreement between Targeted Genetics and
    its officers and directors                                                                                              |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.1           |  |  |  |  | 
|            | 10 | .2 |                     | Form of Senior Management Employment Agreement between the
    registrant and its executive officers                                                                                        |      |  | 10-K |      |  | 12/31/1996 |  |  | 10.2           |  |  |  |  | 
|            | 10 | .3 |                     | Gene Transfer Technology License Agreement, dated as of
    February 18, 1992, between Immunex Corporation and Targeted
    Genetics*                                                       |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.3           |  |  |  |  | 
|            | 10 | .4 |                     | PHS Patent License Agreement  Non-Exclusive, dated as
    of July 13, 1993, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*                   |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.4           |  |  |  |  | 
|            | 10 | .5 |                     | PHS Patent License Agreement  Exclusive, dated as of
    March 10, 1994, between National Institutes of Health
    Centers for Disease Control and Targeted Genetics*                      |      |  | 10-K |      |  | 12/31/1997 |  |  | 10.10          |  |  |  |  | 
|            | 10 | .6 |                     | Patent License Agreement, dated as of December 25, 1993,
    between The University of Florida Research Foundation, Inc. and
    Targeted Genetics*                                         |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.5           |  |  |  |  | 
|            | 10 | .7 |                     | First Amended and Restated License Agreement, effective as of
    October 12, 1995, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*              |      |  | S-1  |      |  | 4/16/1996  |  |  | 10.30          |  |  |  |  | 

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|            |    |     |                     |                                                                                                                                                                                                                      |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | --- | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                            |     
|            |    |     |                     |                                                                                                                                                                                                                      |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                                      | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                                      |      |  |      |      |  |            |  |  |                | 
|            | 10 | .8  |                     | Amendment to First Amended and Restated License Agreement, dated
    as of June 19, 1996, between The University of Tennessee
    Research Corporation and RGene Therapeutics, Inc.*                                 |      |  | 10-Q |      |  | 6/30/1996  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .9  |                     | Second Amendment to First Amended and Restated License
    Agreement, dated as of April 17, 1998, between The
    University of Tennessee Research Corporation and RGene
    Therapeutics, Inc.*                     |      |  | 10-K |      |  | 12/31/1998 |  |  | 10.16          |  |  |  |  | 
|            | 10 | .10 |                     | Exclusive Sublicense Agreement, dated June 9, 1999, between
    Targeted Genetics and Alkermes, Inc.*                                                                                                                |      |  | 8-K  |      |  | 1/6/1999   |  |  | 10.36          |  |  |  |  | 
|            | 10 | .11 |                     | Amendment Agreement to Exclusive Sublicense Agreement, dated as
    of March 12, 2002, between Targeted Genetics and Alkermes,
    Inc.*                                                                             |      |  | 10-K |      |  | 12/31/2003 |  |  | 10.52          |  |  |  |  | 
|            | 10 | .12 |                     | Amendment No. 2 to Exclusive Sublicense Agreement, dated as
    of May 29, 2003, between Targeted Genetics and Alkermes,
    Inc.*                                                                                   |      |  | 8-K  |      |  | 10/1/2003  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .13 |                     | Common Stock and Warrants Issuance Agreement, dated June 9,
    1999, by and between Targeted Genetics and Alkermes, Inc.                                                                                            |      |  | 10-Q |      |  | 6/30/1999  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .14 |                     | Warrant Agreements, dated June 9, 1999, by and between
    Targeted Genetics and Alkermes, Inc.                                                                                                                      |      |  | 10-Q |      |  | 6/30/1999  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .15 |                     | Funding Agreement, dated as of July 21, 1999, among
    Targeted Genetics, Elan International Services, Ltd., and Elan
    Corporation, plc                                                                          |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.3            |  |  |  |  | 
|            | 10 | .16 |                     | Subscription, Joint Development and Operating Agreement, dated
    as of July 21, 1999, among Elan Corporation, plc, Elan
    International Services, Ltd., Targeted Genetics and Targeted
    Genetics Newco, Ltd.* |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.4            |  |  |  |  | 
|            | 10 | .17 |                     | Convertible Promissory Note, dated July 21, 1999, issued by
    Targeted Genetics to Elan International Services, Ltd.                                                                                               |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.5            |  |  |  |  | 
|            | 10 | .18 |                     | License Agreement dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Targeted Genetics*                                                                                                              |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.6            |  |  |  |  | 
|            | 10 | .19 |                     | License Agreement, dated July 21, 1999, between Targeted
    Genetics Newco, Ltd. and Elan Pharmaceutical Technologies, a
    division of Elan Corporation, plc*                                                     |      |  | 8-K  |      |  | 8/4/1999   |  |  | 1.7            |  |  |  |  | 

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|            |    |     |                     |                                                                                                                                                                                                              |      |  |      |      |  |            |  |  |                |  |  |  |  | 
|----------- | -- | --- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  |  | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                    |     
|            |    |     |                     |                                                                                                                                                                                                              |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                              | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                              |      |  |      |      |  |            |  |  |                | 
|            | 10 | .20 |                     | Termination Agreement, dated March 31, 2004, among Targeted
    Genetics, Elan Corporation PLC, Elan Pharma International
    Limited, Elan International Services, Ltd. and Emerald Gene
    Systems, Ltd.* |      |  | 8-K  |      |  | 4/06/2004  |  |  | 99.2           |  |  |  |  | 
|            | 10 | .21 |                     | Agreement and Plan of Merger dated as of August 8, 2000,
    among Targeted Genetics, Inc., Genovo, Inc., TGC Acquisition
    Corporation and Biogen, Inc.*                                                  |      |  | 8-K  |      |  | 8/23/2000  |  |  | 2.1            |  |  |  |  | 
|            | 10 | .22 |                     | Development and Marketing Agreement, dated as of August 8,
    2000, between Targeted Genetics, Genovo, Inc. and Biogen,
    Inc.                                                                            |      |  | 8-K  |      |  | 9/13/200   |  |  | 10.1           |  |  |  |  | 
|            | 10 | .23 |                     | Funding Agreement dated as of August 8, 2000, between
    Targeted Genetics and Biogen, Inc.                                                                                                                 |      |  | 8-K  |      |  | 9/13/2000  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .24 |                     | Amendment to Funding Agreement, dated as of July 14, 2003,
    between Targeted Genetics and Biogen, Inc.                                                                                                    |      |  | 8-K  |      |  | 7/22/2003  |  |  | 10.3           |  |  |  |  | 
|            | 10 | .25 |                     | Amendment No. 2 to Funding Agreement, dated
    September 1, 2005, between Targeted Genetics and Biogen Idec                                                                                                 |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.1           |  |  |  |  | 
|            | 10 | .26 |                     | Amended and Restated Promissory Note of Targeted Genetics dated
    September 1, 2005 (issued to Biogen Idec in principal
    amount of $10,000,000)                                                         |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.2           |  |  |  |  | 
|            | 10 | .27 |                     | Amended and Restated Promissory Note of Targeted Genetics dated
    September 1, 2005 (issued to Biogen Idec in principal
    amount of $650,000)                                                            |      |  | 8-K  |      |  | 9/1/05     |  |  | 10.3           |  |  |  |  | 
|            | 10 | .28 |                     | Industrial Collaboration Agreement, dated as of February 1,
    2000, between the International Aids Vaccine Initiative, Inc.,
    Childrens Research Institute and Targeted Genetics*                      |      |  | 10-Q |      |  | 9/30/2002  |  |  | 10.1           |  |  |  |  | 
|            | 10 | .29 |                     | Amendment No. 1 to Industrial Collaboration Agreement,
    dated as of March 14, 2003, among the International Aids
    Vaccine Initiative, Inc., Childrens Research Institute and
    Targeted Genetics*   |      |  | 10-K |      |  | 12/31/2002 |  |  | 10.42          |  |  |  |  | 
|            | 10 | .29 |                     | Amendment No. 2 to Industrial Collaboration Agreement,
    dated August 1, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute*             |      |  | 10-Q |      |  | 9/30/2003  |  |  | 10.2           |  |  |  |  | 
|            | 10 | .30 |                     | Amendment No. 3 to Industrial Collaboration Agreement,
    dated December 2, 2003, among Targeted Genetics,
    International Aids Vaccine Initiative, Inc. and Childrens
    Research Institute*           |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.2           |  |  |  |  | 

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|            |    |     |                     |                                                                                                                                                                                                                       |      |  |      |      |  |            |  |  |                |  |  |  |   | 
|----------- | -- | --- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  | - | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                                                                             |     
|            |    |     |                     |                                                                                                                                                                                                                       |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                                                                                       | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                                                                                       |      |  |      |      |  |            |  |  |                | 
|            | 10 | .31 |                     | Study Funding Agreement, dated as of April 23, 2003,
    between Targeted Genetics and Cystic Fibrosis Foundation
    Therapeutics, Inc.*                                                                             |      |  | 10-Q |      |  | 3/31/2003  |  |  | 10.2           |  |  |  |   | 
|            | 10 | .32 |                     | Collaboration Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                            |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.56          |  |  |  |   | 
|            | 10 | .34 |                     | Manufacturing Agreement, dated December 31, 2004, between
    Targeted Genetics and Celladon Corporation.*                                                                                                            |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.57          |  |  |  |   | 
|            | 10 | .35 |                     | Common Stock Purchase Agreement, dated December 31, 2004,
    by and among Targeted Genetics, Enterprise Partners and Venrock
    Partners.                                                                           |      |  | 10-K |      |  | 12/31/2004 |  |  | 10.58          |  |  |  |   | 
|            | 10 | .35 |                     | Biological Processing Services Agreement, dated as of
    March 28, 2003, between GenVec, Inc. and Targeted Genetics*                                                                                                 |      |  | 10-Q |      |  | 3/31/2003  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .36 |                     | Agreement Under an NIH Prime Award, dated February 8, 2006,
    between The Childrens Hospital of Philadelphia and
    Targeted Genetics*                                                                            |      |  | 10-K |      |  |            |  |  |                |  |  |  | X | 
|            | 10 | .37 |                     | Office Lease, dated as of October 7, 1996, between Benaroya
    Capital Company, LLC and Targeted Genetics                                                                                                            |      |  | 10-K |      |  | 12/31/1996 |  |  | 10.26          |  |  |  |   | 
|            | 10 | .38 |                     | First Lease Amendment, dated May 12, 1997, between Targeted
    Genetics and Benaroya Capital Company, LLC                                                                                                            |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .39 |                     | Second Lease Amendment, dated February 25, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                      |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.2           |  |  |  |   | 
|            | 10 | .40 |                     | Third Lease Amendment, dated April 19, 2000, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                          |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.3           |  |  |  |   | 
|            | 10 | .41 |                     | Fourth Lease Amendment, dated March 28, 2001, between
    Targeted Genetics and Benaroya Capital Company, LLC                                                                                                         |      |  | 10-Q |      |  | 6/30/2001  |  |  | 10.4           |  |  |  |   | 
|            | 10 | .42 |                     | Fifth Lease Amendment, dated January 2, 2004, between
    Targeted Genetics and Benaroya Capital Company, LLC*                                                                                                        |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.3           |  |  |  |   | 
|            | 10 | .43 |                     | Canyon Park Building Lease, dated as of June 30, 2000,
    between Targeted Genetics and CarrAmerica Corporation                                                                                                      |      |  | 10-Q |      |  | 6/30/2000  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .44 |                     | Olive Way Building Lease, dated as of November 20, 1993, as
    amended, between Targeted Genetics and Ironwood Apartments, Inc.
    (successor in interest to Metropolitan Federal Savings and
    Loan Association) |      |  | 10-K |      |  | 12/31/1999 |  |  | 10.29          |  |  |  |   | 
|            | 10 | .45 |                     | Fifth Amendment to Lease Agreement, dated as of June 20,
    2003, between Targeted Genetics and Ironwood Apartments,
    Inc.                                                                                        |      |  | 8-K  |      |  | 7/22/2003  |  |  | 10.2           |  |  |  |   | 

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|            |    |     |                     |                                                                                                                                                           |      |  |      |      |  |            |  |  |                |  |  |  |   | 
|----------- | -- | --- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | ---- |  | ---------- |  |  | -------------- |  |  |  | - | 
|            |    |     |                     | Incorporated by Reference                                                                                                                                 |     
|            |    |     |                     |                                                                                                                                                           |     
|Exhibit No. |    |     | Exhibit Description |                                                                                                                                                           | Form |  |      | Date |  | Number     |  |  | Filed Herewith | 
|            |    |     |                     |                                                                                                                                                           |      |  |      |      |  |            |  |  |                | 
|            | 10 | .46 |                     | Sixth Amendment to Lease Agreement, dated as of November 1,
    2003, between Targeted Genetics and Ironwood Apartments, Inc.*                            |      |  | 8-K  |      |  | 1/13/2004  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .47 |                     | 1992 Restated Stock Option Plan                                                                                                                           |      |  | S-8  |      |  | 7/10/1998  |  |  | 99.1           |  |  |  |   | 
|            | 10 | .48 |                     | Stock Option Plan for Nonemployee Directors                                                                                                               |      |  | 10-Q |      |  | 3/31/2001  |  |  | 10.34          |  |  |  |   | 
|            | 10 | .49 |                     | 1999 Stock Option Plan, as amended and restated March 22,
    2004                                                                                        |      |  | S-8  |      |  | 6/17/2004  |  |  | 10.1           |  |  |  |   | 
|            | 10 | .50 |                     | 2000 Genovo Inc. Roll-Over Stock Option Plan                                                                                                              |      |  | S-8  |      |  | 10/19/2000 |  |  | 99.1           |  |  |  |   | 
|            | 21 | .1  |                     | Subsidiaries of Targeted Genetics                                                                                                                         |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 23 | .1  |                     | Consent of Independent Registered Public Accounting Firm                                                                                                  |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 31 | .1  |                     | Certification of Chief Executive Officer pursuant to
    Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
    Act of 1934, as amended          |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 31 | .2  |                     | Certification of Chief Financial Officer pursuant to
    Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
    Act of 1934, as amended          |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 32 | .1  |                     | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |      |  |      |      |  |            |  |  |                |  |  |  | X | 
|            | 32 | .2  |                     | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |      |  |      |      |  |            |  |  |                |  |  |  | X | 






|  |                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Portions of these exhibits have been omitted based on a grant of
    or application for confidential treatment from the SEC. The
    omitted portions of these exhibits have been filed separately
    with the SEC.

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